Why bank guarantees and security deposits deserve accounting attention
For many Swiss SMEs, winning a public tender, signing a framework agreement with a major client or renting a new office involves a recurring requirement: providing a bank guarantee or paying a security deposit. On paper they look like simple formalities; in reality they affect liquidity, margins and financial reporting for months or years.
A bank guarantee is a commitment by the bank to pay a specified amount if the company fails to meet its contractual obligations. A security deposit, by contrast, is a payment of money (or a restriction on an account) in favour of the beneficiary, refundable when predefined conditions are met. Both reduce financial flexibility, but they behave very differently in the accounts.
This guide explains the most common types in Switzerland, correct accounting treatment under Swiss accounting standards (Swiss GAAP FER), often underestimated costs and strategies to limit the impact on operating liquidity.
Bank guarantee or security deposit: operational differences
Before recording a transaction, it is essential to understand which instrument the contract requires. The distinction determines accounting treatment, bank charges and the degree of working capital immobilisation.
| Criterion | Bank guarantee | Security deposit |
|---|---|---|
| Legal nature | Ancillary commitment by the bank (surety) | Payment of money or restriction on account |
| Immediate cash outflow | Generally no, unless cash collateral is required | Yes, with amount blocked or transferred |
| Main cost | Bank fees and cost of collateral | Opportunity cost of immobilised capital |
| Typical duration | Tied to the underlying contract (months/years) | Until lease expiry or end of relationship |
| Risk of loss | Contingent until the bank pays | Real if the beneficiary retains the amount |
| Examples in Switzerland | Bid bond, performance guarantee, VAT guarantee, customs guarantee | Commercial lease deposit, supplier deposit, restricted customer advance |
Contexts where Swiss SMEs encounter them most often
Public and private contracts
Contracts under public procurement law (nLPP) and many B2B agreements may require a bid bond and a performance guarantee: percentages are not set uniformly at federal level, but are defined in the tender or contract (in construction practice, under SIA standard 118, often between 5% and 10% of the contract amount). For a CHF 500,000 project, this can mean guarantees of CHF 50,000 or more, with effects on the credit line from the moment of the bid.
Commercial leases
Landlords often require 3 to 6 months' rent as a security deposit (with no legal cap for commercial premises, unlike residential leases) or an on-demand bank guarantee. In cities such as Zurich, Geneva or Basel, on annual rent of CHF 120,000, the restriction can exceed CHF 30,000 for several years; with a bank deposit under Art. 257e CO, interest accrues in favour of the tenant, whereas with a bank guarantee the main cost is the annual premium.
VAT and customs guarantees
The FTA may require VAT guarantees under Arts. 93 and 94 of the VAT Act if tax collection appears at risk, in case of arrears or, for businesses without domicile or registered office in Switzerland, also for probable debts. Similarly, import/export may require customs guarantees (transit, warehousing, special procedures). These guarantees cover fiscal risks and are subject to periodic review by the authority.
Social security and insurance guarantees
OASI compensation funds, pension funds or insurers may require bank guarantees in place of or in addition to deposits to cover outstanding premiums or contributions. These are delicate situations, because the guarantee is often a condition for continuing business operations.
Accounting under Swiss standards
SMEs applying the Code of Obligations with ordinary bookkeeping or Swiss accounting standards (Swiss GAAP FER) must distinguish between contingent liabilities, restricted assets and liabilities to third parties. The most common error is recording nothing because «no cash leaves the business».
Bank guarantees issued
A bank guarantee generally does not appear as a certain liability on the balance sheet, but as an off-balance-sheet commitment (contingent event). It must be documented in the notes with amount, beneficiary, expiry and any collateral. If the bank requires a blocked account or pledge of receivables as counter-guarantee, the restricted portion must be reclassified from «Cash and current assets» to «Restricted assets» or a dedicated account.
Bank fees (issuance, annual renewal, amendments) are recorded as a period expense: Bank charges payable / Cash or, if material and linked to a specific project, they may be capitalised as contract cost if internal policies and materiality allow. In practice, for most SMEs they are posted directly to the income statement.
Security deposits paid
A security deposit paid is a receivable from the beneficiary. For rental deposits, Art. 257e CO requires the landlord to hold the funds with a bank in an account in the tenant's name. If repayment is expected within 12 months, it is classified as a current asset (e.g. «Security deposits» or «Other current assets»). If the restriction extends beyond the next financial year — as is often the case for lease contracts — it must be recorded under non-current assets.
Typical entry on payment: Security deposits / Cash. On repayment, the reverse entry. If the beneficiary retains part for damage or disputes, the lost portion must be reclassified as an expense (e.g. «Maintenance expenses» or «Ancillary charges») or offset against any receivables from the landlord.
Security deposits received
If the SME receives a deposit from a customer or tenant, this is a liability until repayment: Cash / Security deposits received. It must not be confused with revenue: it does not trigger VAT if it is a simple refundable deposit without consideration (principle of Art. 18 VAT Act). Only if the contract explicitly provides that the deposit becomes consideration (e.g. final instalment or flat penalty) do the tax rules for that consideration apply.
Hidden costs: beyond the stated commission
The visible cost is the bank commission. The real economic cost includes blocked capital, reduction of credit facilities and administrative burdens. For an SME with limited liquidity, these elements can far exceed the annual commission.
| Cost item | Order of magnitude | Accounting impact |
|---|---|---|
| Annual guarantee commission | 0.25%–1.5% of guaranteed amount | Financial expense on income statement |
| Issuance / renewal fee | CHF 100–500 per transaction | Administrative or financial expense |
| Cash collateral (100%) | Equal to guarantee amount | Asset reclassification, no P&L cost but liquidity effect |
| Reduction of credit line | 10%–100% of equivalent value | Higher facility utilisation, possible additional interest |
| Capital opportunity cost | Commercial interest rate or alternative return | Not recorded, but relevant for margin analysis |
| Legal fees and contract review | CHF 500–2,000 per complex guarantee | General expenses or contract costs |
Numerical example
A construction company wins a CHF 800,000 contract and must provide a 10% performance guarantee (CHF 80,000). The bank requires 30% cash collateral (CHF 24,000 blocked) and charges an annual commission of 0.75% (CHF 600). With a financing rate of 4%, the opportunity cost of the collateral is CHF 960 per year. Total economic cost thus exceeds CHF 1,500 per year — more than double the visible bank commission alone.
Impact on liquidity and working capital
Guarantees and security deposits reduce available liquidity without always appearing among classic liabilities. A balance sheet with positive cash can conceal insufficient operating liquidity if a significant portion of assets is restricted.
For internal monitoring, many SMEs calculate a free liquidity indicator: cash and equivalents minus security deposits minus restricted collateral minus minimum operating cash balance. This figure should feed the treasury budget and decisions on new investments or hiring.
During contract negotiation, it is worth estimating the cumulative effect: an SME with three active guarantees of CHF 30,000 each and two lease deposits may have over CHF 100,000 of capital that cannot be used, without the balance sheet showing a corresponding liability.
Cash
Free account balance
− Restrictions
Deposits and collateral
= Free liquidity
Available for operations
Practical recording in accounting software
A proper analytical setup avoids surprises at year-end and simplifies dialogue with banks, auditors and investors.
1. Create dedicated accounts in the chart of accounts
At minimum: «Security deposits paid» (asset), «Security deposits received» (liability), «Restricted bank accounts» (asset), «Bank guarantee expenses» (expense). Link each account to a cost centre or project when the guarantee is tied to a specific contract.
2. Maintain an off-balance-sheet commitments register
For each active bank guarantee, record guarantee number, beneficiary, maximum amount, start and end dates, type of collateral and annual cost. At year-end, the register must match declarations to the bank and the notes to the financial statements.
3. Automate expiry dates
Set reminders 60–90 days before each guarantee or deposit expires. Automatic renewal is common in lease contracts and performance guarantees: a forgotten renewal can incur additional fees or maintain restrictions that are no longer needed.
4. Document repayment or release
On release of a deposit or cancellation of a guarantee, keep written confirmation from the beneficiary or the bank's release statement. Only with this document can the accounting position be closed correctly and free liquidity updated.
Strategies to reduce financial impact
Negotiate the terms
- Request lower percentages based on track record or bank references
- Replace cash deposit with bank guarantee or vice versa, depending on which costs less
- Provide for progressive reduction of the guarantee based on work progress
- Agree return of the lease deposit at end of contract, not months later
Optimise the banking relationship
- Compare commissions and collateral requirements across several banks
- Use framework guarantees to cover multiple contracts under a single limit
- Consider surety insurance as an alternative
- Avoid 100% cash collateral if the bank accepts pledge of receivables
Surety insurance, offered by specialised companies, can replace bank guarantees in some sectors. The cost is often comparable or lower, with less impact on bank facilities, but not all public or private clients accept it. Always verify before submitting a bid.
Common mistakes to avoid
| Mistake | Consequence | Correction |
|---|---|---|
| Not recording deposits paid | Overstated cash and understated receivables | Record the deposit asset immediately on transfer date |
| Ignoring off-balance-sheet commitments | Incomplete financial statements for banks and auditors | Dedicated register and updated notes |
| Confusing deposit with revenue | Risk of VAT error and inflated revenue | Separate liability until any contractual offset |
| Forgetting guarantee renewals | Contract breach or urgent fees | Expiry calendar with automatic alerts |
| Not including costs in the quote | Actual margin lower than expected | Project budget with «guarantee financing costs» line item |
Checklist for business owners and accountants
- ✓Identify whether the contract requires a bank guarantee, security deposit or insurance alternative
- ✓Calculate total cost (commissions + collateral + opportunity cost) before signing
- ✓Record payments, restrictions and liabilities received in the accounts on the correct dates
- ✓Update the off-balance-sheet commitments register with every new guarantee or amendment
- ✓Monitor free liquidity, not just the bank balance
- ✓Document every release with confirmation from the beneficiary or bank
- ✓Verify in the notes that guaranteed amounts are consistent with bank declarations
Conclusion: financial transparency as a competitive advantage
Bank guarantees and security deposits are normal instruments in the Swiss economy, but their impact on liquidity and accounting is often underestimated. An SME that tracks them rigorously — both on the balance sheet and in the off-balance-sheet register — gains a realistic picture of available cash and negotiates new contracts with greater confidence.
Integrating these elements into the project budget, chart of accounts and treasury monitoring is not bureaucracy: it is financial management. With a structured approach, it is possible to seize commercial opportunities without compromising operating liquidity stability.