Commercial property tenants will be able to unlock their security deposits with the launch of an insurance product this week.
The scheme from London-based Credo Guarantees enables tenants to take out an insurance policy guaranteeing the deposit on their property and injecting their business with working capital. It could release millions of pounds back into the economy.
Currently landlords demand security in the form of a rental deposit or a bank guarantee (often backed with a cash deposit) frequently equivalent to six months rent before leasing a property.
Under the new initiative, CredoBond, a prospective tenant can approach Credo to set up the alternative facility.
"On receipt of an initial guarantee fee from the tenant, typically around five to ten per cent of what the full rental deposit would have been, the underwriter issues the landlord with a guarantee", said Credo's David Ovsiowitz. "This guarantee is an undertaking to honour the tenant's financial obligations under the lease up to a specified maximum sum."
Credo earns commission of up to 15% of the premium paid from the underwriter, Trenwick International. The agreement is on a tied-agency basis, though this may change in time if Trenwick feel its book is sufficiently large.
Ovsiowitz said he was confident that business people would find the "opportunity cost" associated with injecting their deposit monies back into their business would far outweigh any concerns they might have about paying insurance premiums.
"Although the occupier is paying for the cover, this is more than offset by the cost benefit of retaining between 90 and 95% of the working capital which otherwise would have been locked away."
Funding the payments would be tax efficient. At the end of the first month, the period of the cover reduces by a month. Therefore the tenant pays an initial 12 months of premiums supported by a monthly guarantee extension fee.
Ovsiowitz is keen to broaden the product to include other forms of insurance as add-ons.
