Understanding Surety Bonds


If you own a business, than you understand the importance of trust. The trust between you and your clients the trust you build between your contractors. To help foster these relationships, you may need to rely on Surety Bonds to help increase the trust between your business and the suppliers, customers, and organizations you deal with.

With Surety Bonds, there are three parties involved: the bond holder (the principal), the entity requiring the bond (the obligee) and the insurance company which offers the bond guaranteeing obligations that will be fulfilled. A bond premium is paid to the surety company in exchange for the bond they provide. A claim can arise if obligations are not satisfied. The surety will investigate the claim. If the claim is valid the surety will pay it, but will come to the bond holder for reimbursement.

Surety Bonds guarantee the performance of contracts. They are generally needed for the following businesses: general contractors, subcontractors, service contractors, heavy-equipment contractors, suppliers and manufacturers.
For certain businesses, the advantages that Surety Bonds offer, include:

• They do not present a significant drain on cash reserves
• They do not encumber balance sheets and are not reportable
• They allow for rate adjustments as the collateral fund grows
• Bonds avoid over-funding through the use of trust funds
• They allow for maximum efficiency of capital and resources, avoiding double funding