Surety Bonds: Explanation of Surety Bonds

If you need to do business with a company you do not know, you can ask the company to purchase a surety bond. A surety bond is a financial guarantee and protects you from someone else’s misrepresentation. A surety bond is there to encourage you to enter into a business agreement with an unknown company by proving their trustworthiness in fulfilling their promises.

A surety bond is an agreement between three parties:

  • The principal, who will be fulfilling his contractual obligations.
  • The obligee, who will be receiving the obligation.
  • The surety, who ensures the principal’s obligation.

A principal can pay an annual premium for the continued support of the surety bond company. Surety bond companies have been licensed and verified by your state’s Department of Insurance and the federal Department of the Treasury’s Financial Management Service (FMA).

The two main types of surety bonds are: contract bonds and commercial bonds. A contract bond guarantees a contract, such as a bid; and a commercial bond refers to the terms of a bond form, such as a license or permit.

Surety Bonds: Explanation of Surety Bonds

The construction industry relies heavily on surety bonds and the surety company’s producers and underwriters. Construction companies use them to guarantee their company will perform the requirements of a contract when dealing with the continuous flow of new clients and their lawyers and accountants. A surety bond can also protect a contractor’s family and private assets.

Surety companies can also guarantee the clients and ensure payment to the construction company whether it is a corporate or private project. A surety company can also review a contract and recommend the negotiation of any risks.

Before the surety decides to back a company, he will perform an evaluation. The surety will base his decision on:

  • The experience of the owner and his industry reputation.
  • The company’s plan in business continuation in the event that the owner must leave.
  • The profit, credit history and the number of previous projects and their value.
  • The size of the company and its ability to complete the terms of the contract.

The surety agrees to fulfill the principal’s obligation if the principal fails to honor his contract with the obligee. A surety bond will allow you to expand your business into new territory with a much bigger sense of financial security.

Surety Bonds: Examples Of Various Surety Bonds

If you are arrested and the court allows you out on bail, you may need a surety bond if you cannot afford your bail. You will have to pay your bondsman about ten percent of the bail’s total but he will cover you for the remaining 90 percent, with your home or other major asset as collateral. If you decide to skip town, then the bounty hunter that comes to get you is the surety. A surety bond to cover your bail is just one example of a surety bond.

A contract bond is used in the construction industry and has three basic types:

  1. A bid bond guarantees the contractor will honor the bid he has put on a project.
  2. A performance bond is a financial guarantee for the project owner that the contractor will fulfill the terms of the contract.
  3. A payment bond is a financial guarantee for associated suppliers, subcontractors and employees that the contractor will pay them for their materials and labor.

Commercial surety bonds have four basic types:

  1. A license and permit bond is for a service provider to guarantee he will follow the codes, laws, statutes or regulations pertaining to his field. There are thousands of different types of bonds to cover almost every available service, including a mortgage broker, auto dealer, telemarketing, health care professionals, health spas, plumbers and electricians.
  2. A court bond, or probate bond, guarantees the honesty of the fiduciary in performing his duties as an estate representative for a person who is deceased, incompetent or is a minor. A court bond can guarantee an entrusted position, such as an executor, guardian or trustee.
  3. A public official bond is to guarantee that an elected official will fulfill his duties, such as a notary public, judge or police officer.
  4. There is also a category of miscellaneous bonds for special circumstances, including lost securities (such as checks and stocks), hazardous waste removal, self-insured workers compensation, utility payments, and union wage and welfare bonds.
Surety Bonds: Examples Of Various Surety Bonds

There is also a custom’s bond for shippers, to financially guarantee they have followed the import/export laws and paid the appropriate fees. There is also a tax bond to guarantee a businessman consistently pays his taxes.

For whatever business you are in, there is likely a surety bond available to financially guarantee performance. You can continue your business ventures with greater confidence and financially security when you use surety bonds.

Surety Bonds: Why Buy Surety Bonds?

Surety bonds are different than insurance. In an insurance policy, the risk is transferred to the insurer. In a surety bond, the risk stays with the bonded company (or principal). If the principal reneges on his promise, the surety company will come and seize his assets. Also, a surety bond is for one specific company and insurance is unrestricted in who it pays.

Bonding your company with a surety bond is a great idea if you are a new company or you want to expand your business into new territory. Companies are usually very nervous about doing business with a start-up or someone who has not yet established his reputation.

As an individual, you may be required to have a surety bond to perform certain jobs or work for certain companies. Government agencies require employees to have surety bonds as do many private companies, especially those entrusted with a business’s security, money and other valuables.

As a service provider, having a license and permit bond is a great idea because it will give your clients confidence by showing them that an official entity is confident in your ability to follow the laws and guidelines of your profession.

Construction companies can greatly benefit from bid bonds because they can be guaranteed to honor their bid rather than be required to put down their capital; this frees the contractor’s capital for uses in other areas rather than sitting unused until the bid winner is announced.

If you are a private contractor and want to work for the U.S. government, you are required to have a performance bond in place before you can be hired. The performance bond guarantees to the government that you will fulfill your contractual obligations.

In the entertainment field, representatives such as boxing and wrestling promoters, and talent agency representatives must be bonded. This is to protect the boxers, wrestlers, actors, dancers, musicians, models, and all other entertainers, from having their career mishandled. A surety bond will ensure that the agent will perform his duties and represent his client to the best of his abilities. If you are an actor looking for an agent, first ask if he is bonded.

As the obligee of a surety bond, you are financially guaranteed a positive outcome in a business arrangement. Whether it comes from the principal or the surety, you will be paid.

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