Depending on the nature of your business and the business activities you need to perform, you may be required to obtain a surety bond at some point down the road.
It is not uncommon for business owners to have misconceptions about surety bonds, because the purposes of these bonds can vary greatly. While some people regard them as credit, others consider them a form of insurance. You can visit here to know more.
If you want to gain a better understanding of surety bonds, you may find the following information helpful….
What is a Surety Bond?
A surety bond is a contract that involves three parties, namely, the principal, the obligee and the surety.
The principal is the party that is responsible for fulfilling a contractual obligation, while the obligee is the party for whom the principal is performing work. The surety is the party that ensures that the principal will meet its contractual obligation.
If the principal fails to fulfill the requirements of the surety bond, the surety will pay the obligee the bond amount and try to get reimbursement from the principal.
The obligee can use the money it receives from the surety to hire another company to complete the job.
There are several different types of surety bonds, and the most common among them are license and permit bonds.
According to an article entitled “The Cost of Surety Bonds and Why There’s Such a Wide Range“, those who wish to conduct certain business activities are required by the federal, state or municipal government to obtain these bonds.
These bonds serve as a guarantee to the government that the principal will meet all applicable regulations and standards.
Benefits of Surety Bonds
Other than meeting government requirements, there are many other reasons why you should consider getting surety bonds.
Below are some of the benefits of surety bonds:
- Ensures project completion
- Provides qualified and capable contractors
- Offers financial security
- Provides financial, technical and managerial assistance
- Reduces the risk of liens placed by suppliers, subcontractors and laborers
- Facilitates transition from construction to long-term financing
- Lowers costs
- Protects taxpayer money
Understanding the Costs of Surety Bonds
Different states have different laws regarding surety bonds, and the costs of surety bonds are usually outlined by these laws. However, the costs of certain types of surety bonds are calculated on a case-by-case basis.
For instance, the amounts of contract bonds are based on the total costs of projects.
Contract bonds for large construction projects can cost tens or hundreds of thousands of dollars, whereas those for smaller projects may cost as little as a hundred dollars. Some types of surety bonds come in standardized amounts for every applicant.
Another factor that affects the cost of a surety bond is the risk involved in the project. Surety bonds for risky projects are usually costlier.
If you are planning to obtain a surety bond, it is advisable that you get it from a reputable surety bond provider.
Do some research and comparison shopping to find the best deal.
About the Author: John McMalcolm is a freelance writer who writes on a wide range of subjects, from social media marketing to Cloud computing.