If you are doing business in the USA, it is highly likely that you have come across the term “surety bond.” Many US companies promote themselves as being “bonded and insured” and proudly display it next to their logos. However, surety bonds are far from being easy to explain. It is no wonder many entrepreneurs and business owners struggle when it comes to that particular topic.
In this article, we will provide you with a detailed explanation of what surety bonds are and what they are used for. We will explore which industries require them and go through the process of obtaining one for your business.
What Is a Surety Bond?
A business that has a surety bond offers a financial guarantee that the terms of their contract will be fulfilled. In contrast to insurance, which covers damage claims as a whole, a surety bond applies to a specific contract, protecting customers, project owners, and government institutions through a legally binding financial agreement.
Surety bonds are issued by neutral guarantor companies called sureties. A surety agrees to provide financial reimbursement to the obligee of the bond if the principal (the company that has the bond) violates any terms of their contract.
It is important to remember that if your bond is successfully filed against, you need to fully reimburse the surety company for the amount they have paid to the obligee. This is another key difference between surety bonds and standard insurance.
How Are Surety Bonds Used?
We need to point out that even though surety bonds are common, they are often not used. In order for an obligee to win a claim against your bond, you would need to fail to deliver as per your contractual obligations or violate industry-specific rules or laws that are in effect in your state. If that ever happens, the obligee can file the necessary paperwork with your surety — after submitting a notice of intent.
The surety will then examine the claim and see if the obligee has actual grounds for filing against the bond. If the claim is valid, you will be required to make good on your obligations and/or provide financial compensation to the obligee. Surety bonds are designed to protect your customers and ensure that your brand reputation stays intact, even if something goes wrong with a project.
Keep in mind that surety bonds are generally useful for brand credibility, as well. Some private project owners will only do business with a company if it is fully bonded. On top of that, a surety bond shows that you act with integrity and professionalism. In some cases, this can lead to acquiring new business without complex marketing and participation in public bids.
Are Surety Bonds a Requirement?
While surety bonds are generally great to have, they are also a requirement for some types of companies. In fact, if you operate in some of the biggest industries out there, you need to have a surety bond. Usually, industries that have to do with a lot of financial investments and risky projects utilize surety bonds. For example, public tenders for construction projects require all participants to be fully bonded before even placing a bid. The same applies to many other industries.
Aside from construction, other major industries that require surety bonds include:
- Car and boat dealerships
- Travel agencies
- Notaries public
- Medicare-covered medical equipment providers
- Collection agencies
- Mortgage brokers
If your business is operating in one of those industries, make sure you check what surety bonds you need to acquire. You can contact your local authorities to get in-depth information if you are not sure.
How to Get a Surety Bond for Your Business
Obtaining a surety bond for your business is a relatively simple process. First, you need to find a surety company that can issue the bonds you need. Next, you have to apply for the bonds by submitting all required paperwork. Before granting you the bond, however, the surety will perform some checks on you and your business.
Surety bonds involve some level of risk for the surety company. Just like with insurance, a high-risk client might be problematic for the company itself. For this reason, sureties run a variety of background checks. Your credit score, business history, and overall financial situation will be investigated thoroughly. The good news is that it is highly unlikely for you to be denied a surety bond.
If you are considered a high-risk client because of a bad credit score and financial situation, this will reflect on the surety bond cost. Generally, the premiums you have to pay for a surety bond are between 1%-5% of the value of the surety bond. Keep in mind that you might have to pay above-average premiums in case your background checks reveal some issues. The same goes for new companies and startups since they are usually considered risky.
As you can see, surety bonds are a useful tool that can provide you with a safety net, should you fail to deliver the agreed results on a project. Such financial guarantees are not simply good to have — they are an outright requirement for many of the world’s biggest industries. Businesses like construction companies and car dealerships need to get bonded in order to be competitive, get new business, and grow. For the rest, having a surety bond is a great way to boost your brand image and credibility.