What Is a Surety Bond?
A surety bond is an insurance that safeguards government entities and clients against financial losses. It’s a three-party agreement between the principal, the surety company, and the obligee.
For example, say a local government agency hires your construction company for a job. If you cannot meet your responsibilities, the party you owe those obligations can claim against the bond to receive compensation.
1. Definition
What is a surety bond? A surety bond guarantees that a principal will fulfill a specific obligation outlined in the bond form. This may be a contract, license, or legal requirement. One type of bond, a contract surety bond, guarantees that the contractor will fulfill the contract’s requirements for a project. Another type, a licensing or permit bond, ensures that the principal conducts their business in compliance with local laws and regulations. If someone breaks the bond, the person owed money can ask the surety for payment.
The benefit of a surety bond is that it reduces risk for lenders and can lower interest rates for borrowers. Furthermore, it enables principals to showcase their dedication to financial accountability and ethical business conduct. It can also free up assets that might be required as collateral for other forms of security. A surety bond is an agreement between the principal, the surety company, and the obligee.
2. Benefits
When paired with small business insurance, surety bonds serve as financial guarantees. Having one can make your company more competitive when bidding on projects, as it signals to potential clients you have financial stability. The bond also protects the interests of other parties in a contract, like suppliers and laborers who expect to get paid for their services.
You’ll likely be required to have a surety bond before being granted a license, finalizing a contract, or proceeding with a civil trial. In some cases, the surety bond is a prerequisite before a lending institution can extend financing for a project. For instance, government agencies require contractors to secure bid bonds to be awarded contracts. A bid bond assures a government agency that your company will complete work on a project within an agreed-upon time frame and guarantees the payment of any supplier materials, subcontractors, or laborers working on the job.
3. Requirements
There are many different types of surety bonds. The type you need depends on who requires you to get the bond and the industry in which you operate. A specialty surety agency can help you find the right form for your requirements.
Most bonds require the principal to contact a bonding company and supply documentation, including financial statements, list of references to evaluate business history, and more. A soft credit pull is typically required; a premium rate determines the bond’s cost.
If the bonded principal does not meet their contractual obligation, harmed parties can file claims against the bond for financial losses they have suffered. If a claim is valid, the bonding company will pay out the claim, and the bonded principal must reimburse them. Qualifying for a surety bond may be difficult if you have previous claims against your record or credit. However, this is only sometimes a deal breaker, and you should explore your options to obtain a surety bond.
4. Cost
A surety bond typically costs between 1% and 15% of the total bond amount. This is based on the type of bond and an individual’s financial strength and credit history. Individuals with low credit or a history of claims on previous surety bonds are considered high risk and will pay a higher rate than individuals with good credit.
Conclusion
The best way to ensure you pay a fair rate is to improve your credit and financials before applying for a bond. This may include contacting creditors and clearing up any outstanding debts. This will help ensure that a claim against your bond is not denied.
