Many business owners need to have a surety bond in place in order to do business, especially contractors. The entity that the business owner wants to do work for wants to make sure that they will do the work they say they are going to do and do it right. There are three parties involved in a surety bond. These are the principal, which is the business owner, the obligee which is the party they want to do work for, and the surety bond company which issues the bond.
In exchange for paying the premium for the surety bond, the surety company will issue a bond with a specified face amount, often $5,000 for small business general contractors. If the principal doesn’t fulfill their obligations than the surety company can be on the hook to pay that face amount to the obligee. For this reason, surety bonding companies fully check out the creditworthiness of principals before they will issue a bond and at what cost.
In regards to issuing surety bonds, surety companies use credit history to determine how responsible the principal is. Business owners with good credit histories can easily get a bond and the premium will be comparatively low. Those with bad credit will either pay a higher price for the surety bond or find that they can’t obtain one at all. If an obligee makes a claim on a bond than the surety bond company will fully investigate what happened. If they determine the claim is valid they will reimburse the obligee for the amount of money they were out up to the face value of the bond. They will then require the principal to repay them for how much was paid on the surety bond plus any legal fees that occurred.
Surety bonds are generally purchased through insurance agents. These agents have offices across the nation to issue surety bonds Scottsdale AZ being one example. Many agents have at least a few different surety bond companies they work with and can get quotes from when one of their customers need to get a bond in place.
Since surety bonds play such a vital role in business the Small Business Administration is involved in helping companies obtain bonds. Their website, found here, goes over the ins and outs of obtaining a surety bond. The SBA even backs the surety bonds of some surety companies in order to help small business owners that are having difficulty meeting the requirements of obtaining a bond.
As the SBA website points out there are four main types of surety bonds. The first type, a bid bond, is issued to guarantee that a contractor will meet the obligations of completing the work on a job they bid on. The second type is a payment bond which backs the principal paying their suppliers and subcontractors. A performance bond is designed to provide assurance that a project will be fully completed while there is a fourth broad category called ancillary which is for various specialty bonds.