Finance Matters: 6 Key Things You Need To Know About Surety Bonds

You’ve probably heard the term “surety bonds” here and there, yet have no idea what it means. Well, surety bonds are contracts between three parties: you, the nation, and the entity that requires the bond. In official terms, you are called the principal, the nation is the surety, and the other entity is the obligee.

The surety’s role is to guarantee to the obligee, financially, that the principal will not break the terms mentioned in the bond. In this article, you will learn 6 things you need to know about surety bonds.

  1. How Do They Work?

Surety bonds are three-party agreements between the principal, the surety, and the obligee. The surety bond serves as a financial guarantee that the contract or the terms in the bond will be followed and that all duties executed, and all regulations followed.

For instance, construction companies in the U.S. are required to obtain surety bonds by law whenever they’re taking on a public project. When a municipality awards bids on construction projects, the contractor who wins is required to obtain several bonds, which typically include a Payment Bond. This bond guarantees that even if the contractor defaults, all workers and subcontractors would still get paid.

The bond also helps protect taxpayers and the municipality from potential financial troubles. In case of harm or the inability to meet the terms of the bond, subcontractors can file a claim against the bond. 

  1. Types of Bonds

You need to know that there are three main types of contract surety bonds. The first one, which is the bid bond, offers a financial guarantee that a bid has been submitted with sincerity of intention and that the contractor plans to partake in the contract at the price bid.

The bond ensures that the contractor will offer the needed payment and performance bonds. The performance bond serves as protection against monetary loss in case the contractor fails to execute the contract in compliance with the terms and conditions.

The payment bond guarantees that the contractor will pay material suppliers, subcontractors, and workers regardless of the circumstances. 

  1. Getting a Surety Bond

For decades, insurance companies have been providing security bonds. If you’re a business owner, then the chances are that you already possess plenty of insurance policies.

This is why you can ask your insurance provider if they carry this type of bond. Insurers at suggest that you also check with stand-alone surety providers for the best deals. A state Department of Insurance essentially licenses surety companies.

The process of the bond application is very similar to that of loan approval. The underwriters will look into your credit profile, financial history, and managerial team, along with various other key markers. 

  1. Do You Need a Surety Bond?

Surety bonds are needed to ensure that a company or individual will comply with a contract or keep certain duties, in compliance with all the related laws and regulations. They help keep the owners of projects, employers, and the general public financially protected.

You need to assess the environment, your industry, as well as the circumstances of your own business to find out whether you need a surety bond. However, collection agencies, auto dealers, auctioneers, durable medical equipment providers, construction companies, and the notary public are a few examples of companies and fields that would require surety bonds.

However, you can still benefit from the bond’s benefits even if your company isn’t required to have them.

  1. How Much Does It Cost?

The cost of your surety bond largely depends on your financial status, the type of bond you’re applying for, and the surety. Companies with outstanding credit are likely to receive competitive rates.

Those with poor credit ratings may need to find a surety that provides high-risk bonds. These usually come at higher rates. 

  1. The Rates

Generally, bond rates lie anywhere between 1 to 3 percent of the final amount. However, applicants with less-than-perfect credit may come across rates that are as high as 20%. Though this depends on the market they’re looking into.

Applicants may be required to have satisfactory equity, which is typically up to 5 times the amount of the bond. Some businesses are also likely to come across higher surety bond rates, as compared to other applicants because they don’t have solid financial history or credit.

These rates are highly unstable and competitive. If you want to purchase a surety bond, you need to take your time and look into several options to find the best rate you can get.

Many people are generally mixed up between insurance policies and surety bonds. Surety bonds are a lot similar to a type of credit. They serve as an additional, vital layer of protection when it comes to a business’s finances and legalities. There are many cases in which a business can’t operate without them. 

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