Surety bonds are like an insurance policy for the person who requires the bond. Many are the times where the government agency is the obligee, and so a bond is presented to cover the government and citizens from any losses that may arise as a result. This obligee will need the principal who is now you taking the bond to obtain and pay for it.

Surety Definition

They are legally binding contracts where some obligations have to be met for the three parties involved:

• The obligee; this is usually the person who requires the bond
• The surety; this is the insurance company assuring the principal that it will fulfill the obligation.
• The principal; is the person who needs the bond.

How the Surety Bond Works

As you are already aware, surety bonds are like insurance. In any case, the requirements of the bond are not met, such as failing to reward the vendors and not performing the work contracted; the party infringed may file a claim against that particular bond. 

So the principal should repay the surety whether the obligee or the public presented the claims. Even though this surety backs the bond, you will still be required to pen your signature on an indemnity agreement. The indemnity agreement will, therefore, pledge your personal and corporate property to reimburse the surety bond in case any claims or legal costs arise. 

What the Surety Bond Covers

When surety bond claims arise, you will be expected to pay for each fee including, the legal costs. The surety on your bond says that you have the financial muscle to cover any expenses or claims that may come up. In case the surety is wrong, and the cash cannot be obtained from the courts or you directly, the courts will be responsible for those expenses.

Because of this, bonds are underwritten while considering the potential of the principal who is causing the claim. They will also consider the financial ability of the principal to repay any claim that may arise in the future.  

Types of Surety Bonds

Each business is quite different, and so every business will require customized bonds that will meet the requirements of his business. Usually, there are three categories of surety bonds that a company may decide to take in, and they include:

• Contractor bonds – companies or individuals constructing public projects are more likely to obtain this type of surety bond.
• Permit and license bonds – this category of bonds is mainly for professionals who operate legally. Examples of these professionals include freight brokers, auto dealers, and also licensed contractors.
• Court bonds – these are the surety bonds required by specific courts for certain purposes. Such may include judicial or probate bonds.

How to secure a surety bond

After you are now aware of the type of bond you need, you have to determine what the requirements to acquire that bond is. Different counties, states, and cities may have different requirements for a surety bond depending on the business. Follow these steps to obtain the right bond:

• Contact the local licensing authority or the person requesting the bond to inquire which category and the amount of the bond you need.
• Make good use of a bond analysis tool to know the exact bond you need for your business
• Talk to bond professionals for assistance in case you require help in determining the surety bond you need

Bottom Line

Surety bonds are generally beneficial to your business. It is like credit to your company, which is very cost-effective in meeting the obligee requirements. Also, by using other alternatives such as your assets to cover the contract decreases your capital.