What is a Collateral Bond?
A Collateral Bond is different when used in the context of a surety bond. In the financial world, a collateral bond is a short term debt security, which is used to provide collateral against a company’s bond issuance. However, in the surety bond context, a collateral bond is a bond that requires some piece of collateral to secure the underlying performance or payment bond.
For many companies, they can qualify for a performance bond or payment bond without the need for any collateral. We work with our clients to try and get them surety bonds without collateral. The reason for this is pretty obvious. They more collateral that is required, the less collateral is available for other purposes.
Where we typically see collateral used to secure a bond is in the performance bond situation where a company is not fully financially secure. In those situations, the company cannot qualify on its own for the bond. So, the surety company will require that the Obligor post some sort of collateral. What is preferred is liquid collateral, like a bank line of credit. However, other collateral can be used, such as real property, other property such as equipment. Obviously, equipment is not preferred as it can be sold, which would eliminate it from being used by the surety as a piece of collateral upon default.
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