What is a Surety Bond?
Surety bond insurance is a contract that ensures certain obligations among the person requiring the bond, the person who needs the bonds, and the surety or insurance company that guarantees that the principal can meet these obligations.
The principal purchases the bond to guarantee the quality of work to be done in the future.
The obligee is the one that requires the principal to purchase a bond to avoid potential financial loss and it is usually a government agency.
The surety is the one who issues the bond and financially guarantees the principal’s capacity to perform specific tasks.
How Do Surety Bonds Work?
Surety bond insurance provides financial guarantees that contracts and other business deals will be completed in accordance with mutual terms.
The applicant would usually need to provide basic information on the business, it is then reviewed and a corresponding premium would be assigned based on the surety company’s applicable rate filings.
The premium is the price that the applicant would need to pay for the surety bond insurance for the designated term.
- Customer Confidence and Consumer Relations
Surety bond service gives you the confidence that you need to prevent penalties for practicing without a bond since there are several industries that require surety bond insurance to license their practitioners, including some contractors, dept collectors, private investigators, and car dealers.
Working with unfamiliar businesses, especially in an industry that tend to be targeted by fraudsters, is one of the biggest concerns that most customers have. This surety bond insurance boosts the confidence in your business since customers know that you can be held accountable for your performance and you know that they won’t risk losing a large amount of money if you fail to provide the services that were promised in the bond.
- Affordable Alternative to a Letter of Credit
A letter of credit is an alternative to a surety bond insurance that also seems to work in similar ways, the third-party agreement is issued by the bank and guarantees payments will be made to the beneficiary under specific conditions. Though they sound similar, surety bond service is more affordable and has more stable, predictable rates, and typically costs only 1-3 percent of the bond amount with good credit.
- Reduces Unqualified Competition
People who apply to get a surety bond insurance go through a strict review process to assess financial security and qualifications for their certain industries. Security bond requirement is often dependent on your history. If you are poorly qualified and have a questionable history then it might be a little bit more difficult for you to get the bonds. This is the reason why the amount of competition faced from unqualified business owners and contractors in the area are less.
Obtaining a surety bond insurance can open up a greater number of business opportunities, regardless of whatever industry you are a part of, with having financial strength and ethical business practices, you are showing that you are capable, hence bringing in more possible partnership.
Surety bond services provide businesses and customers with peace of mind that their assets will be protected. It provides a defense against false claims and they tend to act as the representation when these claims occur.
Everyone is covered, everything is laid out to all of the parties involved. they are all in the know, they know about the timing and the scheduling which establishes trust and responsibility towards all the parties involved.
How much is a Surety Bond?
You typically don’t have to pay the full surety bond amount, you will generally have to pay 1-15% of the total bond amount until it needs to be renewed. The higher risk bond may cost 10% or more of the bond’s value. You cannot cash a surety bond after you purchase it.
There are usually some factors affecting the price of the surety bond insurance:
- Coverage amount required by the bond
- Type of surety bond
- Applicant’s credit score
- Applicant’s financial history
Surety bond insurance is a way to protect not only the business owners but the customers as well, ensuring their peace of mind.