What Are Surety Bonds and How Do They Work?

A surety bond seeks to guarantee that two parties will meet their obligations.

A surety bond seeks to guarantee that two parties will meet their obligations.

Surety bonds are an important part of business. Some professions even require you to take out a surety bond just to work in them. This doesn't mean that the business and professional world are the only places that surety bonds are used, of course. Before taking out a surety bond, it's important that you understand exactly what one is and how it works.

Identification

A surety bond is an agreement among three parties designed to ensure that the terms of a contract between two businesses or individuals are met. The bond is taken out with a third party, and in the event of an accident or other loss that causes the contract to not be fulfilled, the third party covers the cost of the loss.

Function

The provider of a surety bond, known as a surety agent or bondsman, issues a bond on behalf of one party of a contract. The bond provides a financial guarantee to the other party, ensuring that the party will receive the product, service or action promised by the contract or its financial equivalent. If the surety agent has to pay out on the bond, the party who took out the bond is responsible for repaying the full amount to the agent.

Types

Several types of surety bonds are available for both businesses and individuals. Performance bonds guarantee that a company will complete a project, bid bonds guarantee that bidding contractors can afford to purchase a performance bond if they win the bid, and payment bonds cover subcontracting costs. License bonds cover the cost of obtaining professional licenses for professions such as engineering and running an auto dealership. Customs bonds guarantee that importers will abide by U.S. laws, and tax bonds guarantee the payment of sales tax. Court bonds and bail bonds guarantee court appearances or the following of court orders.

Process

To get a surety bond, you need to submit an application with a surety agent or bondsman that offers the type of bond you need. The agent will check your credit and may check other references as well to calculate the cost of issuing you the bond. Depending on the amount the bond covers and the results of the credit and reference checks, you'll have to pay between 1 percent and 20 percent, or possibly more, of the cost of the bond. Once the bond is approved and you've signed the bond agreement, you'll receive your bond in a day or two (sooner in some cases, such as the issuance of bail bonds).

About the Author

Born in West Virginia, Jack Gerard now lives in Kentucky. A writer and editor with more than 10 years of experience, he has written both articles and poetry for publication in magazines and online. A former nationally ranked sport fencer, Gerard also spent several years as a fencing coach and trainer.

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