If you haven’t been in business for a long time, you might be confused about exactly what surety bonds are. It is made even more confusing by the fact that requirements differ by state and specific industries. You can think of it as a tool to manage risk. After all, when doing business transactions, both you and the customer are at risk.
What Are Surety Bonds?
A surety bond is a legally binding agreement that protects your customers from you not delivering what you promised. They play a significant role in many businesses, and in some industries, you cannot legally operate without having a surety bond in place. Unfortunately, many people misunderstand what a surety bond is, which can lead to a lot of problems for people trying to start a business.
Categories of Surety Bonds
Surety bonds don’t just come in one flavor. There are a few categories that include performance bonds, payment bonds, supply bonds, warranty and maintenance bonds, and bid bonds. These categories are often used in the construction industry, and they can vary from project to project. As the names imply, it is there to protect the entity hiring the contractor. For example, the performance bond ensures that the entity is protected if the contractor doesn’t do a good job. It means that you have more than the contractor license at risk.
Payment bonds exist to ensure that subcontractors and suppliers get paid for doing their jobs. In general, everyone gets the peace of mind they need when doing business with each other.
People Involved in the Surety Bond Process
A surety bond consists of three legal entities. You have the principal, the obligee, and the surety.
The Principal
The principal is the company responsible for meeting an obligation. For example, if you are a company that needs to get a surety bond to obtain a license, you would be the principal in this case. As a principal, you purchase the bond to show your customers that you can guarantee the work done.
The Obligee
The obligee is typically the government or another local authority. They are the ones that require the bond for the principal.
The Surety
The surety is another company that guarantees that the principal will meet its obligation. If the principal does meet its obligation, the surety is responsible for paying out a set amount to the obligee.
This Process in Action
Let’s say you are a small company bidding for a contract with the government. Since it is a government contract, you are more than likely required to get a surety bond. Before you can even bid, you will be required to get one. This example should showcase how crucial it is to get surety bonds when working with government contracts.
Surety Bonds vs. Insurance
One of the common misconceptions that many people have is that surety bonds are the same thing as insurance. However, it should be noted that they are different from each other, and you should not get the two of them confused. Insurance protects your business, while a surety bond protests whoever you do business with. While you can get surety bonds from the surety department of an insurance company, it is often better to go with surety agencies instead.
Why You Need a Surety Bond
A surety bond demonstrates trust, performance, and stability. By having that bond, you show potential customers that it isn’t a risk to do business with you. These types of bonds protect your customers and government interests, should you not deliver on your products/services.
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SubscribeState Contracts
Many government contracts you see today require businesses to have a surety bond. There are many industries where government contracts are the lifeblood for businesses. In those cases, it is more important than ever that you have a surety bond in place to guarantee access to those contracts.
Industries That Need Surety Bonds
You typically need surety bonds for working with certain government agencies. In some industries, they are required. These industries include:
• Construction companies
• Auto dealers
• Auctioneers
• Mortgage brokers
• Notary publics
• Collection agencies
• Auto dealerships
• Health clubs
• Travel agencies
• Medical equipment providers (when covered by Medicare)
As you can see, this list is quite exhaustive, and it can be difficult navigating the nuances of each specific industry.
Getting a Surety Bond
How do you get a surety bond? The major stumbling block in getting a surety bond is having the surety deconstruct every aspect of your business. They will check for financial stability, your company’s history, credit history, and even your organizational structure. It is all about getting a good understanding of what risk you pose to them for providing you with the surety bond.
It should be noted that this is just the first process. After this, you get your quote. You have the option of going with the surety department from an insurance company or a surety agency. It is typically better to go with an agency.
There’s always a risk in businesses that a job will not be done to a customer’s satisfaction. Surety bonds provide that guarantee that customers need. It also satisfies the legal requirements that many businesses need to operate.
