What is a surety bond?

A surety bond is a type of agreement that exists between three individuals or companies. It essentially puts the responsibility of a loan on a third-party. This individual or company agrees to cover the total balance remaining on the loan in case of default. A surety company acts as a middleman and agrees to find another company or person to take over the loan. Businesses often use these bonds as a way to pay for contracts they bid on from the government and for private contracts that can increase their profits.

What is This Type of Bond?

A bond of this type consists of three different individuals or companies. The first is the obligee, which is the person or company who needs the bond. The second is the principal. This refers to anyone who agrees to take out a bond for that person or company. The last company involved in the process is the surety company. This is the company that actually gives out the loan but on the agreement that the principal will either take over the loan later or find someone willing to take over that loan to reduce the risks associated with a larger bond.

Other Bond Types

The Small Business Administration lists four different types of bonds that fall under the category of surety bond. A bid bond is one a company takes out prior to bidding with the agreement that the company will pay off the bond once it receives the contract. A payment bond provides the company will funds to pay any contractors or suppliers who worked on the job. There is also a performance bond, which requires that borrowers pay back the amount due after reaching certain stages. The SBA also lists an ancillary bond that puts certain requirements in place regarding when companies pay back the bond.

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Charges and Fees

Using a surety bond provides small businesses with help competing against larger companies. Those larger companies may bid much lower on projects because those companies know that you cannot get supplies, workers and equipment at a lower price. Before meeting with a surety company though, you should keep in mind that these companies may charge fees or an interest rate on the bond. You’re responsible for paying back the loan and any other charges. Some organizations and principals will agree to cover those fees for you.

Business Service Bonds

An alternative to these bonds is something called a business service bond. With a business service bond, you can file a claim when a customer accuses you or an employee of theft. The surety company will give you a bond that acts like a form of insurance. Many of the businesses that take out these bonds are those that send employees into the homes of customers and clients, including housekeeping companies and home improvement businesses. You can only draw against this type of bond is a customer files a complaint in court and if the court convicts your employee of a crime.

When you bid on a government contract job, you have the chance to make a large sum of money that can help your profits and the reputation of your business grow. If you lack the funds needed to bid on those projects, you can take out a surety bond to get the funds needed.