For those who don’t know a surety bond is a
contract between three parties – the obligee, the surety, and the principal.
These instruments provide a guarantee that the principal will complete a series
of tasks for an obligee.
This might sound like obscure stuff for small
business owners seeking funding, but surety bonds can be useful for those in
project-based businesses such as construction or information technology. The
bonds are purchased from insurance companies and they provide a level of
financial protection in cases on nonperformance.
If you think your business could benefit from these offerings, then read on as we will review what every business owner needs to know about <a href="https://www.allcommercialsurety.com/bonds-by-state/ohio/" surety bonds.
How Do Surety Bonds Work?
As mentioned, surety bonds are tri-partite
contracts meant to cover risk. Using a real-life example, a surety bond might
be required by a property developer when hiring
a contractor to complete work at one of the properties they own. The surety
bond would protect the developer if the work wasn’t completed correctly.
When this happens the property developer would
file a claim against the bond and the insurance company which issued the bond
would pay the damages. Doing so protects the contractor against additional
losses and this can be handy in cases of disagreement over performance.
Surety Bonds are a cross between a
line of credit and an insurance policy. This is because the principal will take
out the bond and will pay a premium until the work is completed.
In fact, there are four types of surety bonds:
Contract Surety Bonds, Commercial Surety Bonds, Fidelity Surety Bonds, and
Court Surety Bonds. While the all have the same basic function, there are some
differences.
For example, a Contract Surety Bond is used to
guarantee that a contractor will complete the work as described in the
underlying work agreement. In this case, the agreement will ensure the general
contractor completes the work, pays for materials, and pays any subcontractors.
While a Commercial Surety Bond is usually
mandated by governments for businesses operating in certain industries such as
liquor stores. The third type of surety bond is a Fidelity Surety Bond which is
used to protect a company against employee theft. These bonds will cover the
loss of a customer’s money and in some cases fraudulent activity.
The last type of surety bond is called a Court
Surety Bond. These are required by attorneys to protect against loss during a
court proceeding and are meant to guarantee that attorneys fees will be paid
during the litigation period. While
another form of Court Surety Bond is used to protect an estate against the
misdeeds of an executor.
When Will You Need a Surety Bond?
This will depend on the purpose of the bond
and your industry, but a good rule of thumb is if you want to minimize risk and
ensure compliance then you’ll probably need one. Another rule of thumb is to
look at the size of the project – for example, government projects over
$100,000.
As mentioned, these bonds can either be a
requirement for a project or a business or are taken on as part
of a risk management strategy. Regardless of the case, these bonds need to
be taken out before the contract begins.
So, the answer to when you want to get a
surety bond comes down to three variables. Is the bond required? Is it part of
a risk management strategy? Has the contract started? If you answered yes to
the first two questions and no to the third, you might want to get a surety
bond.
What is the cost of a Surety Bond?
While the actual costs will depend on your
situation, the cost of a $100,000 bond with a 1% premium would be $100 per
year. Though this is just a rough idea, the final premium will depend on the
size of the bond, the period, your credit score, and some even consider the strength
of your management team or the performance of the business when
calculating how much is due.
Another thing to know is that many bonds will
limit the bonded amount to a value of the company’s equity. This is known as
the bonding capacity and this is used not only for individual surety bonds but
also to determine the limit for all the open bonds held by a company.
Finding a Bonding Provider
There are a few items you should keep in mind
when looking for a bonding provider. These include licensing, bond offerings,
premium rates, and their underwriting qualifications. Keep in mind, these
products are offered by insurance companies but are usually purchased through
agents, so a good place to start would be to talk to your insurance agent to
find out which bond products they have on offer.
