A surety bond is a legal agreement that states that one party has an obligation to another party to perform a certain duty. For example, when an individual hires a company or another person to undertake a project, they need assurance the contractor will work to the best of their ability. To offer this guarantee, the project owner might require the contractor to sign a surety bond. The surety bond binds the contractor to the terms of the contract. It states they will undertake and complete the project to the best of their ability and on time.
How Does A Surety Bond Work?
As earlier stated, a surety bond is a legal agreement that one party will fulfill its obligation to the other party. It’s a three party contract that includes the principal, obligee and surety. It’s a requirement to have the surety bond in some states before you can work on any construction project.
The terms of a surety bond dictate that the contractor(principal) should cater for any loss if they don’t fulfill their obligation. Surety bonds have become a necessity, especially in the US business world.
1. Parties Involved In a Surety Bond
A surety bond bands three parties in an agreement
- The principal
- The obligee
- The surety
The Principal
The principal is the person or company that buys the surety. The surety guarantees that you will perform your duty to satisfaction. In most cases, the principal is a contractor or a service provider. The surety bond makes their bid more attractive to potential prospects.
The Obligee
This is the person who needs the bond. In most cases, these are project developers or owners. They need the bond to assure them the contractor or the principal will not back down on their obligation. The bond gives them surety they will not suffer any loss should make the principal pull away from the project before seeing it to completion.
The Surety
The surety is the company that is backing the bond. The surety agrees to compensate the oblige should the principal fail to fulfill their obligation.
- A Surety Bond Acts As A Security
Acquiring surety bonds is a demanding undertaking because the bonds act as security. To receive a surety, you need to solicit one from a bondsman company. Before the bondsman company offers you the surety, you have to tender an application. The company will conduct a background check to determine if they can offer you the surety bond.
They will check the credit history of your company. They will also use other avenues to check the creditworthiness of your company. Remember, if you fail on your obligation, the bondsman company will pay the obligee on your behalf. But you have to reimburse the money.
So before offering you the surety bond, they have to ensure you can reimburse them their money. They will also calculate how much it will cost them to offer you the surety.
3. You Have To Pay For a Surety Bond
The cost of a surety differs from one bondsman company to another. But the cost ranges between 1% and 20% of the amount you want the bond to cover. Your credit history and creditworthiness will also determine the cost. If you have a good credit score, you are a low-risk customer. This means the bondsman company will charge you less.
On the other hand, if your credit score is not stable, the company will consider you a high-risk customer. This means the cost can be higher. The percentage might also go up depending on the current situation in your specific industry.
4. Your Surety Bond Has to Be Approved
Once the company has checked your credit history and determined the percentage, they will approve your request. You need to append your signature. Your signature indicates that you understand and agree to the terms of the bond. Some bonds like bail bonds become active on the same day they are approved. Other types of surety bonds might take time to take effect. The waiting time is usually two days. Again, the time you have to wait for the bond approval depends on the bail bond company.
5. You Can Ask for Help To Acquire A Surety Bond
As earlier stated, it can be quite tedious to acquire a surety bond. For this reason, you can solicit the services of a professional to help you with the process. The professional will help you from the beginning until you succeed in acquiring the bond.
Surety bonds are essential in any business dealing. More so in the construction industry. With a surety bond, you are assured that the contractor will work to the best of their ability. Surety bonds act as security to ensure you get compensated should the contractor default on completing the project.
