A Quick Overview on Surety Bonds

September 24, 2019
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We all know being a small business owner is challenging. Business owners need plenty of resources and tools to keep their enterprise alive as well as profitable. Surety bonds are one tool that can prove beneficial to business owners and their customers. These bonds provide the customer with a guarantee that a business will complete the work. Bonded businesses build trustworthiness with their customers by safeguarding their customer’s interests. 





What is a Surety Bond?

A surety bond is a contract that minimizes your risk as a business owner.  It is a form of credit similar to insurance and involves three parties – the principal, the obligee, and the surety. One party is held accountable to the third party if the second party fails to meet commitments or fulfill obligations.  The principal refers to the business owner purchasing the bond. The obligee is the customer requesting the purchase while the surety is the agency backing the bond and providing a line of credit. Surety bonds are typically sold by casualty and property insurance companies. A surety bond is an easy way to give a venture business credibility by demonstrating financial integrity. It also provides assurance that a business is in compliance with state and federal regulations.


Who Needs Surety Bonds?

Surety bonds are essential for contracts and deals involving a customer’s assets. One example where surety bonds are used is construction contracts. If a contractor is hired to remodel the kitchen but causes damage to some part of the house, a surety bond enables the customer to file a claim for the loss incurred. Other businesses where surety bonds are used are car dealerships, travel agencies, health clubs, and cleaning services. Surety bonds are issued after an analysis of the customer’s personal or business finances. In some instances such as with government projects or large commercial projects, surety bonds are a legal requirement.



Reasons to Consider Surety Bonds

Even if your business is not involved in a project that requires a surety bond, there are reasons to consider it as a tool for your business. First, surety bonds may boost your business’s ability to win contracts since customers will safer with a guarantor in place. The bond reassures the customer that the job will be performed and completed as expected. Secondly, in the case where an accident or mistake occurs, surety bonds can reduce the amount you pay out-of-pocket for any damages. Surety bonds can protect your business financially should something go wrong. Lastly, surety bonds can be a great alternative to other costly insurance plans. The bond covers enough of your project and business and offers benefits for both the customers and your business.


How Surety Bonds Work

A surety bond might appear similar to insurance policies, but the two are not the same. One large difference is that businesses with surety bonds will have to repay the bond issuer (the agency) to compensate for the customer’s damages. Thus, if a business owner caused damages worth $5,000, the bond issuer first pays this amount to the customer. The business owner will then have to repay the bond issuer according to the surety bond. One large advantage for the customer is that they save time and effort in pursuing the matter in court. Surety bonds have a term between one to four years. There are also bonds that continue until canceled by the principal or business owner. Surety bonds with an expiration date can also be renewed for a longer term.





Types of Surety Bonds

The four most common surety bonds are:

Commercial Surety Bond – These are mandatory when dealing with government organizations and are intended to safeguard public interest.

Contract Surety Bond – This binds the contractor to the terms of the contract regarding the scope of work for the negotiated price.

Court Surety Bond – Court surety bonds ensures protection in the event of losing a court case. Law firms, attorneys, and companies involved in a court proceeding can make use of this type of bond. These surety bonds can also protect an estate from malpractice.

Fidelity Surety Bond –  These bonds are intended to protect an organization and its customers against fraud or illegal activities of an employee. Companies dealing with large amounts of cash or valuable assets use fidelity surety bonds.


Surety Bonds Costs

The premium on a surety bond can range anywhere between two to ten percent of the bond amount. Your premium is determined by the creditworthiness of your business. In most cases, this is evaluated through your personal or business credit score as well as your business history. Besides paying the premium, once a year you may be required to pay a guarantee fee of 0.75 percent to the Small Business Administration (SBA) if your construction surety bonds are guaranteed by the SBA. In the case of high-risk applicants, premium rates can go as high as 20 percent.


What to Consider When Purchasing Surety Bonds

Consider the following aspects when deciding on a surety bond provider.

  • Bonding license – Surety bond providers must have a bonding license.
  • Types of Offerings – Some surety bond providers specialize in a particular type of bond whereas others offer a full range of surety bonds. Opting for a provider who caters to multiple types of surety bonds might be a better option as this affords you the option to make a switch if your requirements change.
  • Premium Rates – Check around for premium rates and ensure that the rate you are offered is a competitive one. See if there are any hidden costs involved that might take you by surprise after you sign on.
  • Online Facilities – Find out if the provider has an online portal where you can conduct transactions with ease. This should include the ability to apply for your surety bond online as well as the convenience of filing a claim online.



Final Thoughts

When it comes to winning customers and their loyalty, a promise to deliver results can only go so far. Tools such as surety bonds can help business owners send the message that they are committed to the customer’s interest as well as conducting their business with integrity. Whether the bond is for the protection of the customer of the business, both parties can reap the benefits of a surety bond in the case of an accident or mistake. 



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