How do I set up a surety bond?
A surety bond is a written promise to pay the full face value of a contract should one of the parties default. A typical example would be a bonding company that guarantees that contractors will complete jobs. Surety bonds vary in scope and complexity, but all take on some level of risk to compensate for the inadequacies of any single party involved in an enterprise.
It is common for financial institutions such as banks and insurers to require customers or policyholders to arrange for surety bonds before giving them money or entering into business transactions with them, such as loan agreements or insurance contracts.
The first step in getting bonded is selecting a surety company. The going rate for a bond is determined by supply and demand, the size and nature of the job, and the creditworthiness of the contract’s principals. In general, a contractor will be able to secure a more competitive rate by taking on a larger project or one that involves greater risk for the surety company.
What type of business needs surety bonds?
A surety bond is an agreement between three parties where there are two obligations. One party or the “obligee” requires another party to fulfill an obligation like keeping a contract with them. The other party, or the “principal,” agrees to this obligation and puts up money called the “bond.” The third party, or the “surety,” acts as a guarantor for that principal by promising to pay any losses incurred by not fulfilling their side of the contract.
Businesses sometimes need different types of surety bonds depending on their line of work. For example, retailers often need fidelity bonds or performance bonds to use suppliers properly. A contractor might require payment bonds so they can pay from clients when completing projects.
Though many people that have never had to get a surety bond have heard of them, they are still an often misunderstood financial product. Here is what you need to know about surety bonds.
What is a surety bond for a business?
It generally costs a pretty penny to become bonded since businesses know that there is a lot at stake when taking on a task. Bonds are an extra expense to the company, but they can help your business in so many ways. It protects you from mistakes that could cost your business money or, worse yet, result in a lawsuit.
The costs will vary depending on what type of bond is necessary for your business activities, and businesses will need to be bonded if there is a loss due to fraud, embezzlement, theft, misappropriation of funds, or property damage not covered by insurance.
Getting bonded is pretty simple; businesses should always check with their attorney before taking out any sort of surety bond since sometimes specific bonds are required to cover certain types of activity. Once it has been determined which bond is appropriate for the task, the business can go ahead and find a surety bond company.
There are many out there to choose from and it is usually best for businesses to ask friends and associates for recommendations rather than choosing at random. Once you have found a company you can trust, all that’s left to do is get bonded!
Is surety bond refundable?
If an insurance company is used to providing a surety bond, the insurer collects the premium and puts it in their general account. This means that if a claim should arise, the money collected for this specific transaction will be used to pay the guaranteed sum of money.
If an insurer fails to carry out any or either of these tasks, it cannot escape liability through payment or refunded premiums. The only exception is when the parties agree to cancel their agreement before any party has suffered damage (i.e., upon mutual consent). In such cases, refundable premiums can be agreed upon during the negotiation process.
What is a surety bond example?
A surety bond example is a loan agreement between three parties. The lender can be an individual, company, or corporation that provides the funds to be lent out. The second part of this agreement is known as the borrower.
This is the party that requires financing for whatever reason. Usually, this reason has something to do with starting their own business or buying a home. Finally, there’s the third party in this relationship called the surety company.
A surety bond example ensures that regardless of whether or not the borrower pays back the lender, the third party will pay. This is an agreement made between three parties to ensure one party does not take advantage of another. It usually takes place when a person doesn’t have enough money to borrow from a financial institution like the bank but needs the funds for whatever reason.
