Whether you provide the cash surety deposit yourself, or work with a sponsor, the advantage is that the use of cash greatly streamlines the process of pre-qualification for CAP funding, eliminating the added complexity of bank-involved financial instruments. Nobody argues with cash. We’ve never heard a banker say “Your cash uses the wrong verbiage”.
That said, some people are just not comfortable moving cash, even though it is held in a segregated, custodial account, with a contract that prohibits using the deposited funds for any other purpose.
In general, if that’s just not going to work, then we recommend alternative forms of Security, such as a Standby Letter of Credit (SbLC) or similar. An SbLC’s face value would need to be increased, but at least there are additional rules that govern its use and more balanced treatment per well-proven International Chamber of Commerce legal venues, mainly ISP98 ICC 590 or URDG ICC 758. An SbLC (or Bank Guarantee, Sovereign Guarantee, etc.) does introduce significant complexity, but we’re fine with any of those.
To help make this decision, we developed a background paper that explores how the cash surety deposit is contractually arranged, and held, with a section at the end describing worst case scenarios and what would be done to manage those situations. Download this paper (PDF)
How it works — Frequently Asked Questions
- What happens if things go wrong during construction? Would you use the cash to “fix” a contractual breach? The short answer is “no” … in practice, we would find another way to solve or cure the breach.
The development team would work out the cause of such breach to complete the draws and finish the project. See the background paper for specific examples of this.
- Have you ever had to call or cash CAP’s Security? Again, no. The cash surety deposit backstops our bank’s requirement as a form of accountability that filters out fraud. The cash gives us legal rights to demand that any contractual breach be cured within a proscribed period of time. If the client fails to do so, with such a lengthy cure period, and without requesting that a solution be found, then it is assumed they are not interested or able to finish the project, or they have ceased communication, in which case, if necessary, a different party would be brought in to finish the job.
- How much cash surety deposit is best?
The amount of the deposit does not need to be equal to the funding amount, although less leverage does give you more bargaining power to negotiate better terms, 25-35% is the normal range. Slightly larger for faster draws.
Let us know if you have additional questions or apply.