What is a Surety Bond?

A surety bond is a three-sided contractual agreement guaranteeing that a business or individual will fulfill their obligations under a contract and in accordance with business regulations.
The three parties involved in the surety bond agreement are:

If the principal fails to meet their agreed upon obligations with the obligee, the surety may be required to resolve the dispute by paying a claim to the obligee. It is in this sense that a surety bond is similar to a form of credit extended to the principal by the surety.

What happens if a claim is paid by the surety?

As a bonded principal, you must take every action possible to avoid claims. Claim activity may happen in the process of conducting business, whether valid or invalid, but it is ultimately the responsibility of the principal to make sure the disputes are resolved prior to the surety paying out on a claim.

Before becoming bonded, you will be required to sign a indemnity agreement with the surety company where you must agree to pay the surety back if they have to pay a claim due a violation by your company. The surety is only extending you credit, and therefore will expect to be reimbursed if a valid claim is paid. Having a paid surety claim may make it very difficult for you to become bonded again in the future, as it is a standard question on all bond applications, and is usually a cause for declination.

How Surety Bonds Work?

To get bonded, you need to pay only a small percentage of the bond amount, which is called a bond premium. This percentage is different for every applicant and it is based on different factors, such as the type of bond you need, your credit score, financial statements and more.

Surety bond examples:

A popular example from the license bonds category is that of auto dealer bonds. These bonds are required in virtually every state before a dealership can get licensed and be allowed to legally operate in the state.

Performance bonds protect the owner if a contractor doesn’t complete their work as specified in their contract.

Payment bonds protect subcontractors, vendors, and suppliers if a contractor doesn’t pay them what was promised in the contract.

A utility bond is a type of financial guarantee ensuring a person or organization will pay for utilities on time. Most utility companies require customers who are projected to use a large volume of utilities to be bonded before utility services are turned on. Unlike many other surety bonds that exist to protect consumers, utility bonds serve to protect utility companies by ensuring that the company receives payment.

The lease payment bond or lease deposit bond is purchased by the tenant (principal) from the surety for the benefit of the landlord or real estate investor (the Obligee). The lease payment bond or lease deposit bond mitigates the risk to the landlord when each tenant is required to provide a surety bond that guarantees the faithful performance of the terms of the lease. If the tenant breaches the terms of the lease, and is placed in contractual default, the landlord can seek payment from the surety for the ongoing lease payments or damages pursuant to the terms of the agreement.

Lease Payment Bonds and Lease Deposit bonds guarantee multi-year commercial rent payments as stipulated in the lease. The bond may be purchased in one year renewable or prepaid non-cancellable multi-year periods.

Condominium Escrow Deposit Bonds (CEDB) can provide a developer with a low-interest source of working capital for their project. The bonds enable a developer to leverage the deposits which have been collected on pre-sold units before the construction has either commenced or before the construction has been completed.

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