Lease bonds: A smarter conversation about capital and lease security

Cash tied up is cash that can’t work elsewhere.

Yet for many businesses entering a commercial lease, providing security can mean locking away the equivalent of three to twelve months’ rent in a bank guarantee. It’s long been accepted as part of doing business.

But it doesn’t have to be.

Commercial lease bonds are gaining traction as an alternative, giving eligible businesses another way to satisfy their lease security obligations without tying up cash.

What is a commercial lease bond?

A commercial lease bond, including eGuarantee’s Lease Bond solution, allows a business to provide lease security without lodging cash with as a security.

Instead, the tenant pays an annual fee for the guarantee. Approval is based on a financial assessment of the business, usually considering at least 12 months of trading history alongside a range of standard financial information.

Lease bonds are backed by an insurance financial guarantee rather than a bank. From a security perspective, however, they still operate as a guarantee. If a landlord makes a claim under the lease, the bond covers that claim unconditionally, irrevocably and on demand.

For accountants, the difference worth paying attention to is what happens to the client’s capital.

Bank guarantees: when security ties up capital

Bank guarantees have long been the standard and, for some businesses, they remain the right fit. They may, for example, be the only option for businesses with less than 12 months of financial trading history or where the required security value is below $20,000.

But for eligible clients, there’s a significant trade-off: cash.

A bank guarantee typically requires funds to be locked away, which can also reduce a business’s borrowing capacity. Across Australia, it’s estimated that up to $10 billion is tied up this way.

For an accountant looking at a client’s broader financial position, that raises a simple question: could that capital be doing something more productive?

It could be supporting working capital. Funding a fit-out. Hiring staff. Investing in growth. Or simply giving the business more flexibility when it needs it.

There’s an administrative cost too. Bank guarantees remain largely paper-based, and seemingly straightforward changes, such as increasing the guarantee following a rent review, can require another trip through the bank’s processes. For clients with multiple locations, that burden can multiply quickly.

How lease bonds differ

Commercial lease bonds change the equation across a few key areas:

• Capital. No cash needs to be locked away upfront, leaving capital available for operating requirements, investment or growth.
• Borrowing capacity. Replacing an existing bank guarantee may free up borrowing capacity that can potentially be directed elsewhere in the business.
• Process. Lease bonds are managed digitally, giving tenants, lawyers, landlords and agents one place to manage all bonds – even if they are travelling.
• Ongoing administration. Changes to the lease, such as rent increases, can be handled automatically rather than requiring a new process through the bank.
• Eligibility. Lease bonds aren’t suitable for every business. Applicants are assessed on their financial position and trading history, and bonds are only available for security amounts above $20,000.

Where accountants should be looking

For accountants and financial advisers, lease security can become part of a much broader capital conversation with clients.

Consider a growing business taking on a new premises. The lease may arrive alongside a fit-out, additional employees, equipment purchases or expansion costs. Locking away a sizeable amount of cash at precisely that moment may not be the best use of capital.

A lease bond can allow an eligible client to satisfy the landlord’s security requirements while keeping that cash available to the business.

Existing bank guarantees are another area worth reviewing. A client may have significant cash or borrowing capacity tied up across one or multiple guarantees without questioning whether there is now another option.

Replacing those guarantees with lease bonds may release capacity for financing, investment or other strategic priorities.

For clients operating across multiple locations, there’s also an efficiency angle. A centralised digital approach can make it easier to manage security obligations, expiry dates and changes across a lease portfolio.

In other words, something historically treated as a leasing administration issue can become an opportunity to have a more valuable conversation about capital allocation.

How credible are lease bonds?

Of course, freeing up cash only makes sense if the alternative provides landlords with the security they need.

Lease bonds are increasingly accepted by institutional landlords, including groups such as Dexus, Frasers, Brookfield, Vicinity, Centuria and more.

In Australia and New Zealand, this adoption has largely been driven by eGuarantee, with more than 170 landlords onboarded and over $140 million released back into the economy through its Commercial Lease Bond solution.

From a security perspective, lease bonds are backed by a financial institution with a Standard & Poor’s rating of AA-, the same as major Australian banks such as Commonwealth Bank. Similar forms of financial guarantees have also been widely used across the construction and infrastructure sectors for many years.

If a landlord makes a claim under the lease, payment is made unconditionally, irrevocably and on demand. Tenants are also financially assessed upfront, providing an additional layer of risk control.

Another lever for your clients

For accountants, commercial lease bonds are best viewed as another option in the toolkit.

Bank guarantees will continue to make sense for many businesses. But for eligible clients, lease bonds create an alternative that can preserve cash, potentially free up borrowing capacity and simplify the ongoing administration of lease security.

Which option makes sense will depend on the client’s financial position, capital priorities and the landlord’s requirements.

That’s exactly why accountants have an important role to play.

Put lease security on the balance-sheet conversation

Commercial lease security might not traditionally be the first place accountants look when helping clients optimise their capital. But with lease bonds becoming more widely adopted, it’s worth another look.

Understanding how much capital clients have tied up in bank guarantees and whether that capital could be put to better use can uncover opportunities hiding in plain sight.

Because security shouldn’t automatically mean handcuffing cash.

To learn more about how an eGuarantee Lease Bond could work for your client or your own business eGuarantee can provide further information. Visit them at eguarantee.com.au or call 1300 561 804.

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