Are Surety Bonds a Good Idea for Your Business?

Is your business up to speed on surety bonds? If not, you might want to take a crash-course on them to better understand how they could impact your company one way or another.

A surety bond differs from a regular bond in that it is a bond between three parties - the principal, the obligee and the surety.

The principal is the individual or company that purchases the bond, the obligee is the party that needs the bond and the surety is the company responsible for making sure the obligee delivers.

Constructing Surety Bonds

One example of a how a surety bond is used takes place in the construction field.

A construction project owner may hire a contractor or builder to complete a project. The contractor or builder signs a contract that they will complete the job, but the owner may also have them purchase a surety bond in order to guarantee that the project gets completed.

If the contractor does fall through, the owner is not out potentially hundreds of thousands of dollars. But rather, the surety bond insurance company is.

There are many factors that affect the cost of surety bonds.

According to the article "The cost of surety bonds and why there's such a wide range," surety bond cost varies widely.

Different factors that affect the cost include the state government requirements, the specific type of surety bond, credit and whether the bond purchase has to be financed.

As far as cost of the bond, the riskier and more expensive the project, the more expensive the bond will be.

Types of Surety Bonds

There are four types of surety bonds available:

The most common types of surety bonds are license and permit bonds.

Most people need these bonds before they can get their business licenses or engage in business activities.

License and permit bonds are required by federal, state or municipal governments. The construction project example above is an example of a license and permit surety bond.

The two other types of surety bonds are contract bonds and business service bonds.

Contract bonds are needed by construction professionals before they can work on large, publicly funded projects, according to SuretyBonds.com. Business service bonds are used by business owners to protect their clients against employee theft.

Examples of businesses that may purchase a business service bond include locksmiths, painters, moving companies and home maintenance companies.

If your employees are working in someone else's home, it might be worth purchasing a surety bond to protect yourself against theft.

Furthermore, contract bonds can be broken down into even more types.

According to the Small Business Administration (SBA), they are bid bonds, payment bonds, performance bonds and ancillary bonds.

Bid bonds ensure the bidder on a project will see it through to completion, payment bonds ensure the suppliers and subcontractors are paid, performance bonds ensure the project is completed on time and ancillary bonds ensure all other requirements of the contract are completed.

The SBA states that all Federal construction contracts greater than $150,000 will require a surety bond.

If your business is in need of a surety bond, you can apply through a Surety Company or an agent that represents the company.