Funding a bank guarantee or lease bond against property

Security deposits look like a paperwork step until you see the number. A new lease on a larger shop, clinic or warehouse often asks for several months’ rent as a bond or bank guarantee. A government tender may require a performance guarantee. A head contractor may want security from a subcontractor. Every one of them ties up cash at exactly the moment the business is spending to grow.

And when your bank issues a guarantee, it usually wants cash sitting behind it. The money doesn’t disappear, but it can’t be used either. A loan secured on property you own can provide that cash, keep working capital free for the move or the contract, and be repaid when the security comes back.

What security might you be asked for?

Security type	Who asks	How it’s usually provided	When it comes back
Retail lease cash bond (NSW)	Landlord	Cash, lodged with the NSW Retail Bond Scheme within 20 business days	At lease end, through the scheme’s payout process
Lease bank guarantee (NSW)	Landlord	Bank guarantee, usually backed by a term deposit	Within two months after the tenant completes lease obligations
Security deposit (Victoria)	Landlord	Cash in an interest-bearing account, or a bank guarantee	Within 30 days of the lease ending, if obligations are met
Commercial (non-retail) lease security	Landlord	Bond or bank guarantee as the lease says	As the lease says
Tender or performance guarantee	Government agency or principal	Bank guarantee or insurance bond	At completion or the end of the defects period, per contract
Retention on construction work	Head contractor	Amounts held back from progress payments	At completion and after defects, per subcontract

Sources for the state rules are the NSW Small Business Commissioner and the Victorian Small Business Commission. Leases outside retail legislation, and other states, follow the lease terms, so ask your solicitor.

Why do banks want cash behind a guarantee?

A bank guarantee is the bank’s promise to pay a third party, such as your landlord, if they make a valid demand. The bank protects itself by holding security. The NSW Small Business Commissioner says the tenant’s bank usually requires a term deposit of the same amount, which the bank claims if the landlord draws on the guarantee. The Commissioner also notes the landlord can draw on a guarantee for a lease breach or property damage without telling the tenant first.

So a $120,000 guarantee often means $120,000 of the business’s cash locked in a term deposit for the life of the lease. Some banks will secure a guarantee on property instead. If yours will, compare that first. If it won’t, or if your business doesn’t bank where it could get a guarantee, a property-secured loan can provide the cash cover.

When does a short-term loan make sense for a bond?

The honest test is the exit. A short-term loan secured on property should end within months, not years, so it works best when something specific will repay it.

Situations that fit well:

• Moving premises. The new landlord wants security before you get the keys, but the old landlord won’t return yours until after you’ve moved out and made good. The old bond is the exit for much of the loan.
• Winning a contract. A performance guarantee is required at signing, and the contract’s progress payments or completion will release cash to repay the loan.
• Opening a second site. The bond for the new site is due now, and the business’s cash flow over the next 6 to 12 months can repay it. See business expansion funded by property.
• Changing banks. The new bank will issue the guarantee once your accounts are moved and assessed, but the landlord needs it now.

Situations that fit badly: a five-year guarantee with no other source of repayment. In that case, a longer bank facility or negotiating a smaller bond is the better path.

Can you negotiate the bond before you fund it?

Often, yes, and it is worth trying before you borrow a dollar. Landlords and principals ask for security to cover a risk, and the size of that risk is open to discussion.

• Offer a shorter guarantee period. Some landlords will accept a guarantee that steps down after the first year or two of on-time rent.
• Trade bond size against incentives. If the landlord is offering a rent-free period or a fit-out contribution, a smaller bond may be an easier concession. The NSW Retail Tenancy Guide notes incentives are often documented separately, so read the whole package.
• Propose a mix. Part bank guarantee, part personal guarantee from a director, can reduce the cash that has to be locked away.
• Ask about an insurance bond. For tenders and construction contracts, a surety bond can sometimes replace a bank guarantee without cash cover.
• Show your track record. A reference from your current landlord confirming on-time rent and a clean make-good history carries weight.

Every dollar you negotiate off the security is a dollar you don’t have to borrow, lock up or repay.

How it works

1. Get the requirement in writing. The lease or contract clause stating the type of security, amount, deadline and release terms.
2. Ask your bank what it needs to issue a guarantee, and whether it will accept property instead of cash.
3. Enquire with the property you’re offering, what’s owing on it, the amount and the exit.
4. Pick the structure. A caveat loan for a short, smaller bridge; a second mortgage for a longer or larger one; a private first mortgage over debt-free property.
5. Settle. Funds are paid to the business, which then provides the cash bond or term deposit.
6. Repay from the exit: the returned bond, contract income, or a refinance.

Key handover booked and the guarantee isn’t sorted? Make a quick bond funding enquiry and we’ll tell you if the property supports it.

Who it suits

• Medical, dental and allied health practices moving to larger rooms. See medical and dental practices.
• Retailers and franchisees opening a new store or relocating. See retail and franchise.
• Contractors required to provide performance security. See funding a big contract with property security.
• Hospitality operators taking a new venue lease with a large bond.
• Businesses changing banks, where the new bank’s guarantee isn’t ready in time.

When this isn’t the right move

• Your bank will secure the guarantee on property without cash cover. That’s likely cheaper. Use it.
• The landlord will accept a smaller bond or a personal guarantee. Negotiate before you borrow.
• No exit within the loan term. Locking borrowed money into a multi-year bond with nothing to repay the loan is a poor structure.
• The old bond is under dispute. If the outgoing landlord is claiming make-good costs, the returned amount may be smaller or slower. Resolve it first.
• An insurance bond is available. For some contracts, a surety or insurance bond replaces a bank guarantee without cash cover. Ask your broker.

What it costs (without the guesswork)

Pricing for a bond bridge isn’t published because it varies with the property, the borrowing measured against it, the term and how dependable the exit is. We price each one as keenly as those factors allow. You’ll pay:

• Interest, which can be prepaid or capitalised, so nothing is paid monthly while you move or start the contract.
• An assessment fee, varying between loans and shown on the Letter of Offer.
• Legal and registration costs for the security.
• Your bank’s own guarantee fees, if a bank guarantee is involved.

No formal valuation required. A caveat or second mortgage costs more than a first mortgage because the lender ranks behind the bank on title.

Documents you’ll need

• Identification for all borrowers and guarantors.
• The lease, agreement for lease or contract clause setting out the security.
• Your bank’s requirements for issuing the guarantee.
• Evidence of the exit: the old lease and its bond details, the contract’s payment schedule, or a refinance plan.
• Details of the security property and the latest statement for any loan on it.

How fast

Once documents are complete, funding is possible within 24 to 48 hours for up to $5m, and $20k to $250k secured on property is possible same day. The bank guarantee itself takes your bank’s processing time once the cash is in place, so ask how long that is.

Illustrative example: a Melbourne clinic moving to larger rooms

Illustrative example: A Melbourne physiotherapy clinic signs a lease on larger rooms. The landlord requires a $90,000 bank guarantee before handover, and the clinic’s bank wants a matching term deposit. The clinic’s existing $60,000 security deposit with the old landlord will be returned within 30 days of that lease ending, about three months away. The principal owns a townhouse worth about $1,100,000 with $520,000 owing. At an illustrative 65% band on total debt, the townhouse supports about $715,000, leaving headroom of about $195,000.

Bond bridge	Amount
Cash for the new bank guarantee	$90,000
Moving and make-good at the old rooms	$25,000
Principal	$115,000
Interest, capitalised over 6 months	depends on the deal
Assessment fee and legals	depends on the deal
Within the security?	yes, under the $195,000 illustrative headroom
Exit	$60,000 old deposit returned in month 4, balance from practice cash flow by month 6

The guarantee is issued, the clinic moves on time, and the old landlord returns the deposit and interest after the lease ends. The rest is repaid from trading income. For Victorian security and title notes, see our Melbourne private lending page.

Getting your old security back faster

• Book the make-good inspection early and fix agreed items before you hand back the keys.
• Know your state’s return rule. In NSW, the Commissioner says a landlord must return a bank guarantee within two months after the tenant completes their obligations. In Victoria, the Commission says a deposit and interest must be returned within 30 days of the lease ending if obligations are met.
• For NSW cash bonds, the Retail Bond Scheme has its own payout approvals and a mediation service if there’s a dispute.
• Ask your bank to release the term deposit once the old landlord returns the original guarantee.
• For construction retention, note that in NSW retention money on projects valued over $20 million must be held in a trust account.

If the new premises need a fit-out too, read fit-outs and new premises. If you’re thinking about buying rather than leasing, see buying your business premises.

See if you qualify before handover day

A landlord who won’t hand over keys without the guarantee isn’t going to wait for a bank’s credit committee. You can enquire without a credit check, and the enquiry goes to a single direct lender, fundU, rather than being shopped around. A specialist reviews it and replies. Tell us accurately about the property, what is secured on it and where the money to repay will come from, and the answer will be dependable from the start.

See whether your property can cover the bond, or start with secured business loans.