Just 15 or 20 years ago, tech companies had reputations for rapid business cycles and increased risk, making surety bonds for technology-related contracts difficult to obtain. But in recent years, the playing field has changed drastically, with financial experts feeling more confident in tech investment now that technology is a foundational part of our world. Despite these market changes, many technology companies still fall into the old routine of utilizing letters of credit or posting collateral to guarantee their performance. For companies looking to move away from old methods, bonds are an attractive alternative for many reasons: they aren’t credited on the company’s bank line, are not typically listed as contingent liabilities in corporate financial statements, and usually provide a more robust defense against default.
Bottom line? The surety process is no longer out of reach for tech companies. If your company is considering a surety bond, here are five things you should know before you start the process.
1. Understand your options.
Surety in the tech sector is still an emerging market, meaning many risk managers simply don’t know what options are available. There are a variety of bonds that are relevant for the tech industry, however. For example, lease and utility payment bonds can help secure commercial space to expand your operations, while workers compensation, customs, and tax bonds cover dues owed to employees and government entities. Tech companies may also apply for court bonds to cover legal expenses and appeals. This concern is becoming increasingly important as big tech companies and startups alike face legal action for privacy breaches, anti-trust activity, and more.
2. Consider a performance bond.
Performance bonds, which guarantee the completion of a project, are most often associated with the construction industry. But these bonds can be relevant in the tech industry as well, where projects can run in the millions of dollars. A project owner might consider a performance bond for large-scale installation projects, for example. Your surety agent or broker can determine whether a performance bond is right for you by looking at the terms of the bond requirement.
3. Clarify your surety and insurance coverage.
Occasionally, project owners will blur the lines between insurance and surety coverage, but it’s important to separate these coverages within your contract and in your bond form. For example, misunderstandings about surety may lead to requirements in your contract around cybersecurity, when in fact, the bond is meant to cover physical software requirements like servers, equipment, and installations.
4. Get your surety team involved early.
The bond process in the tech sector is unique and complex, which is why it’s critical to get your surety team involved during the early phases of your request for proposal (RFP) process. Your surety agents or brokers can support your review process and assist in making qualifications in your proposal—especially for your bond requirements—to help reduce your risks. Additionally, your surety team can serve as consultants during your bond process to answer your questions and help all three parties achieve a better outcome.
5. Stay in touch with your broker.
Technology is constantly changing, and that means staying in touch with your brokers to evaluate your surety program needs as they shift. Risk managers should have a clear channel of communication with surety agents or brokers.
New strategies for tech leaders
Even while the surety market is still establishing best practices in the technology sector, there is ample opportunity for tech companies to embrace surety as they expand their operations. With the right surety partner, tech companies can scale up while keeping their defenses strong.
Liberty Mutual helps tech leaders power our future with surety bonds that address the varied needs of a diverse and ever-changing industry.
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