What Are Surety Bonds, And How Exactly Do They Work?

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A surety bond is an agreement involving three parties designed to ensure that terms between two business entities or individuals are fulfilled. It’s a requirement in some professions that an individual or firm cannot operate their occupations without surety bonds. 

The third party usually bears the cost occasioned by accidents and losses that come when the terms of the contract aren’t fulfilled. Surety bonds have become an essential aspect of businesses, especially in the sectors that state departments want to regulate. In the US alone, there are over 50,000 surety bonds.

The Process 

Securing surety bonds is often an involving process, considering that the bonds act as securities. If you want to obtain a surety bond, you’ll be required to tender your application with a bondsman offering the type that suits your needs. The process entails checking credits and other references to establish if you’re fit for one. A bond agent may go to the extent of calculating the cost of issuing your ideal bond.

A surety bond may require you to pay between one percent and 20 percent of the amount that the bond seeks to cover. Consequently, the result of the credit and reference checks will also determine the amount that your guarantee taste needs. Remember, you might be required to pay more than the stated percentage, depending on your activities’ industry and nature.

Upon the approval of the bond request, a company or an individual will be required to sign, acknowledging the bond’s terms. Bail bonds usually become active on the same day of approval, but other bonds could take up to two days to materialize.

As mentioned earlier, the application process can be quite tedious. This can see most businesses overlook the idea to acquire the bonds, and that isn’t a good idea. If you are out there and not sure how to undergo the process, the best step is to involve a professional company. This company should assist you from the start, hence making the process quicker. The company should be well-informed about the field to help you pick a type of bond that suits your business. Besides, picking a professional ensures that the application process is secure.

Parties in Surety Bonds

 As stated above, surety bonds are agreements that bring three parties together. Here are the three parties involved;

  • The principal- This is an individual or business that buys surety bonds that guarantee future work performance. The principal is often a contractor or service vendor that purchases surety for compliance, payment, or performance.
  • The obligee- It’s the player that usually needs the bond. Government and state agencies often play the role, but private parties sometimes come into the picture. The agencies put contractual measures to regulate industries and minimize instances of financial loss.
  • The surety- This is usually an insurance firm that backs the bond. The surety normally has credit that the obligee can claim if the principal fails to adhere to the terms of contracts.

Functions

A provider of a surety bond is sometimes referred to as a bondsman or surety agent. A surety agent grants an obligation on behalf of a party in the agreement. The surety bond issued is a financial guarantee to the other party. The bond ensures that the other party receives the service, product, or monetary equivalent through the contract. 

If the principal default on the agreement, the obligee can work on mechanisms to recover the losses involved. The insurance company will pay the amount not exceeding the surety bond if they find the obligee’s claim valid. 

Types 

Various surety bonds exist to serve the interests of different industries and their stakeholders. As already stated, the US alone has over 50,000 surety bonds. Here’s the list of categories of surety bonds;

  • Performance bonds- The stipulate that companies will endeavor to complete a specified project.
  • Bid bonds- These are the bonds that guarantee contractors the amount to purchase performance bonds if they win their bids.
  • Payment bonds- They often cater to subcontract costs.
  • License bonds- They’re vital for some professions who are keen to secure professional licenses in industries such as engineering.
  • Customs bonds- They ensure that importers conform to the laws of the sector.  
  • Tax bonds- These bonds guarantee that a given company will pay tax after selling products and services.
  • Court bonds- They’re often referred to as bail bonds. They guarantee that a suspected offender will appear for court proceedings and abide by court orders.

A surety bond could be what your business needs to gain the trust of customers that you want to serve, whether a company or an individual. Although it comes at a cost, some professions cannot operate without securing surety bonds. It’s essential to consult your financial adviser to find out the bond that your industry needs. 

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