Commercial Lease Bank guarantee alternative:

Bank guarantees have been historically challenging for business tenants as they lock up large amount of cash for years of the commercial lease tenancy, and for commercial landlords they are inefficient archaic paper-based processes.

A bank guarantee is used in commercial property as a form of security against a tenants contractual commercial lease obligations to the landlord. Landlords typically ask for a bank guarantee equivalent to 6 to 12 months of rent which means business tenants need to provide security such as:

• The equivalent in cash deposit or
• Property that has the equity in equivalent value

Bank guarantees also typically require visits to physical bank branches, and are issued in the form of paper which can be lost, or fraudulent, and the instrument has not changed for nearly a century. It’s not up to scratch for today’s modern day.

There hasn’t been an alternative to commercial lease bank guarantees, but in recent years – a new type of lease security financial guarantee has hit Australian and New Zealand shores, Commercial Lease Bonds, a non-collateral digital lease security, and are being used as a favourable commercial lease bank guarantee alternative.

Typically, businesses who look for alternatives to bank guarantees are wanting to free up the cash that they would have had to tie up in a bank guarantee, or are looking for more efficient products that work well with their business operations.

It’s a new type of financial guarantee that leverages the insurance market, as oppose to banking market, and is designed especially to cater for commercial leases.

The biggest difference between bank guarantees and Commercial Lease Bonds is that lease bonds are a non-collateral lease security- therefore, business tenants don’t need to provide cash or their property to have it secured. For example, for a lease in a typical CBD office with an annual lease value of $1 million and requires 6 months in bond value, if a business tenant used a bank guarantee it would lock up $500K in cash before the lease starts, if they take an alternative, lease bond, they get to keep that $500K in their business to invest into growth.

How it works?

When it’s issued, it has two agreements in place, one with the beneficiary – the landlord, and the other with the business tenant. The business tenants pays a fee to have the lease bond issued, which acts like an IOU (I owe you), and the landlord is assured by the financial guarantor to the value of the bond – so if the tenant breaches their lease contract, the landlord can unconditionally, irrevocably and on demand make a claim on the lease bond and the guarantor will pay the claim to the landlord, and then the tenant would need to pay the guarantor back.

In Australia and New Zealand, there is one distributor of the bank guarantee alternative Commercial Lease Bonds, and that’s through eGuarantee. Their Lease Bond is also 100% digitally – to also combat the hurdles of managing a physical bank branch but also has the capability to structure the product to work specifically for commercial leases.

1. 100% digital:

   Commercial Lease Bonds are managed via a digital platform that was built specifically for this product, which means it can be managed 24/7 as long as there is internet access, whereas bank guarantees are paper-based and usually require visits to physical branches.

2. Non-cash collateral required:

   As Commercial Lease Bonds leverage insurance markets, cash upfront as collateral is not required, which means businesses can save large lump sums of cash for working capital. Bank Guarantees require you to provide the cash upfront.

3. Designed for commercial leases:

   Bank guarantees are a generic financial guarantee that is used for a variety of scenarios, and commercial leases are just one of them. Commercial leases have nuances and complexities that a unique to their scenarios – and Commercial Lease Bonds have built features in the financial guarantee to cater for it. For example, it has an automated featured to track the bond value to the annual lease amount, which can change year on year, whereas with a bank guarantee, the tenant would need to get a new issuance every year to ensure it matches.

4. Automated processes:

   Due to the digital management, technology has been built to automate notifications, workflows etc to ensure simple management for both landlords and tenants. Bank guarantees are paper-based and therefore nothing is automated.

5. Enhanced security:

   Commercial Lease Bonds are designed for commercial leases and encrypted digitally, therefore providing better coverage. It can be used to cover incentives, fit-outs and make-good periods and can’t be lost. Paper-based bank guarantees are vulnerable to fraud or the document being lost due to human error.

Digital Commercial Lease Bonds are currently only available to Australian and New Zealand markets and distributed through eGuarantee. It’s for businesses who have commercial leases or are about to embark on a new lease and would rather have that cash used for the business working capital rather than putting it in a bank guarantee.

Commercial Lease Bonds require a financial assessment of the business to be eligible and approved. Therefore, the business tenant will need to provide financial documents, corporate group structure and meet minimum requirements.  Once all application documents are provided and application form is complete, a credit assessment will be undertaken and an outcome can be provided 1 – 3 business days.