Using surety to mitigate tariff impacts

As Canadian businesses struggle to cope with the impacts of the ongoing trade tiff with the U.S., surety might be an overlooked tool on the workbench. 

Tariffs impact duties, taxes and fees, which means customs authorities are asking Canadian importers for more financial security, says Darrin De Stephanis, senior vice president of capital solutions and commercial surety growth leader at NFP Canada.

“Surety bonds can address this by allowing importers to post a bond instead of cash or a letter of credit,” he tells Canadian Underwriter. “This affords importers more liquidity to deploy in their core business.”

He adds surety relationships go beyond bond issuances — and can reach the level of being a sophisticated partner and financial stakeholder.

“When a company establishes a surety facility, it forms an aligned relationship with a financial institution that enhances credibility,” he says. “A good surety also provides legal and advisory support. Partnership takes on a heightened importance in uncertain times like these.”

Related: What tariffs could mean for Canadian industrial real estate

De Stephanis uses the construction industry as an example, noting tariffs can create liquidity challenges for builders and developers who must now cope with the need to make substitutions for some imported materials and components, and navigate supply chain disruptions and project delays.

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He points out surety bonds used by construction firms cover the underlying contract, which makes them a convenient tool.

“Strengthening contract language to include tariff contingencies is essential. Further, guaranteeing these contracts with surety bonds provides an extra layer of protection,” he says. “Construction companies should also consider requesting a surety bond to secure their supply contracts with manufacturers. A supply bond guarantees fulfillment of a supply contract and serves to protect buyers.”

He says businesses should focus on mitigation because tariff impacts cascade across various operational and economic areas. Until tariffs are removed through bilateral negotiations, their effects will remain.

“We’ve entered a new era where even the possibility of new tariffs influences sentiment and decision-making,” he adds. “Liquidity is becoming an increasing pain-point amid escalating costs for almost all industry segments.”

“In general, restricted cash or letters of credit can potentially be replaced by a surety solution for any type of company. This is worth considering when evaluating sources of capital.”

Related: Tariffs: Will they stop cross-border brokerage M&A activity?

Surety bonds also have different benefits for various parties to the contracts, De Stephanis says.

For a business owner or regulatory body, holding a bond acts as a guarantee that alleviates contractual and financial risk. Parties that are required to provide financial security often don’t have many choices, so using a surety facility provides capital flexibility when compared with cash or a letter of credit.

“Since one of the main goals of tariffs today is to increase U.S. domestic manufacturing, a protracted skirmish is likely. Clients should reassess their insurance structures and develop contingency plans using scenario analysis,” says De Stephanis.

“Historically, overleveraging and poor liquidity management have been key drivers of default. Whether growing or maintaining top-line performance, companies should consider developing a surety program to bolster their balance sheet[s].”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.