What Are Surety Bonds? What You Need To Know

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Surety Bonds

If you are wondering about surety bonds, you should know that they are not investment products where a company pays you a fixed interest for a bond or debt that you buy. Surety bonds are nothing like that at all. The easiest way to understand them is to think of them as performance bonds.

The performance bond is basically a contract between three parties: the project owner, the contractor, and the insurer.

In any project, especially construction, there is always the risk of non-completion or non-fulfillment of contractual obligations by the contractor. The insurer or the provider of the surety bond makes sure that any financial loss suffered by the project owner as a result of the contractor’s failure is covered.

Who pays for the surety bond? The contractor, of course. And almost all bids for public works projects are required to have surety bonds with them. This is because the Miller Act requires it for all projects costing over $100,000.

Aside from construction and public works projects, though, there are other cases when surety bonds are required like the courts, which require court bonds. There are also so-called license bonds that you need to get when applying for a permit.

A surety bond is not an insurance policy where you only pay premiums for a certain benefit amount, and where the insurance company pays the claims. With a surety bond, you pay if any claims occur. However, it definitely is better than its alternatives.

What are the alternatives to surety bonds? There are several, including collateral or access to one of your physical assets. In the end, paying for a surety bond is definitely better than giving others access to your assets directly.

A surety bond is really nothing more than a guarantee that you will get the job done. And while you need to provide it when you are bidding on projects, you do NOT need it all the time. So, rather than guaranteeing your performance with collateral, why not have a third-party company do it?

Where can you get a surety bond? There are many companies out there that provide it. As we said before, it is required of all public projects costing over $100,000. So you should be able to find several third-party surety companies. Just do a search on Google and type in the name of your local area. We are pretty sure you will find several.

The way a surety bond works is actually more complicated than we are explaining it in this article. And it would be better if you ask a surety company how it all works if you are new to all this but need to make a bid on certain projects.

Just like anything else, not all surety bond companies are created alike and it will definitely be to your benefit if you compare the terms and conditions of different at least three different companies before making a decision on which one to do business with.

You can find additional information at theokcarena.com.