In many industries, surety bonds are a required part of the licensing process. They’re especially important for businesses that contract with the government.
Surety bonds fill the need of insurance for customers, and they also help businesses secure a line of credit. If a business defaults on a contract, the company providing the surety bond will pay the client a lump sum of money, which is meant to cover any work that the client paid for and didn’t receive.
The bond company still requires the client to pay back the bond money, but the client can pay back the money over time. Surety bonds can be useful for deterring fraud. There are five important facts that all business owners should know about surety bonding.
Surety Bonds Require Three Different Parties
An agreement involving surety bonds requires three different parties. During the bonding process, it’s important to know what is being signed.
A typical surety bond is an agreement between the surety, principal and obligee. To understand how bond premiums are calculated, it’s important to understand that there are three different parties involved in the agreement.
Surety Bonds Aren’t Insurance
A lot of people tend to think of surety bonds like insurance, but the reality is that they’re quite different. The biggest difference between insurance and surety bonds is that surety bonds don’t protect the individual who paid for the bond. A typical insurance company does the opposite and pays the person who purchased the policy.
Surety Bonds Are Like Credit
It’s useful to think of a surety bond as a line of credit. The pricing for surety bonds is determined by a person’s credit score. Almost all surety bonds work just like a line of credit.
If a claim is filed against a contractor, the surety company will pay for the remainder of the work that the client needs, and the contractor is required to pay back the bond money.
Like the banks, companies that offer surety bonds perform research on your credit score and use the information to determine your eligibility.
Bad Credit Isn’t the End
Although a person’s credit score is the major factor used by companies to determine eligibility for a surety bond, it’s not the only factor used. Some great ways to reduce bonding costs are paying outstanding civil judgments, collection and tax liens.
All Agencies Are Different
Most people think of surety bonds as automatic obligations that must be fulfilled. The truth is that the real world isn’t so cut and dry. To have the best chance of getting approved, it’s important to understand that all agencies are different, so you need to choose the agency that is most likely to approve your application and offer the lowest interest rate.