As a business owner, how can you make sure that you are following your state’s regulations? Better yet, how can you ensure your employees’ honesty? Well, if you have been searching for answers to these questions, then you might have probably heard about surety bonds. Surety bonds can be a convoluted concept for people with zero background on financial credit. Because knowledge is power, you need to understand how they work and whether you might need one. So, check out our simple guide for more information.
What Are Surety Bonds?
Put simply, a surety bond is a type of financial credit between three parties: the obligee, the principal, and the surety. The professional bond providers from SwiftBonds.com point out that the surety bond ensures that the principal will fulfill their obligation, and it also protects the obligee in case the principal cannot comply with the terms the parties agreed on. Through the surety bond, the obligee can file a claim and get reimbursed for any damages. Think of surety bonds as contracts that tie the three parties.
What Is Meant by the Obligee, Principal, and Surety?
Now that you have a hint about how surety bonds work, the terms “obligee,” “principal” and “surety” might still be ambiguous. Nonetheless, their roles are pretty easy to understand once you know each party’s rights and obligations.
- The obligee: The party that requests the bond to guarantee the principal’s compliance with the terms.
- The principal: The party that buys the bond to ensure that they will fulfill their obligations. Business owners or other professionals usually take on this role.
- The surety: The party that sells the bond and ensures the principal’s ability to fulfill a particular duty. If the principal fails to carry out the agreed-upon task, the surety covers the obligee’s damages but can request reimbursement from the principal later on.
Why Do You Need a Surety Bond?
To answer this question, you need to understand that there are mainly four types of surety bonds: contract surety bonds, commercial surety bonds, court surety bonds, and fidelity surety bonds. Your business field and the purpose of the bond dictate the type you need.
Here’s a breakdown of why and when each kind is used:
Contract Surety Bonds
A contract surety bond is one of the most common types of surety bonds. It is usually required for large construction projects to guarantee that contractors will finish their work as agreed and on time. In this case, the contractor takes on the role of the principal while the investor becomes the obligee. Notably, contract surety bonds can be also used to ensure that trade contractors like electricians and plumbers will not walk off before finishing their work.
Commercial Surety Bonds
Usually required by the law, commercial surety bonds are popular among businesses. This type guarantees that business owners will comply with the codes and regulations stipulated by the government. Of course, under this scenario, the principal is the business owner and the public is the obligee. Commercial surety bonds are often mandatory for liquor stores and car dealerships.
Court Surety Bonds
This type is made mandatory by the courts, in some instances. What sets court bonds apart from other kinds of surety bonds is that they include many other subcategories and types. The most known types of court bonds are guardianship, appeal, and bail bonds. Guardianship bonds are issued to ensure that guardians shall act responsibly and honestly when managing the assets of minors, the elderly, and disabled people. On the other hand, appeal bonds are issued when a defendant files an appeal. Finally, bail bonds are used by the defendants who cannot pay their bail sum in full. By getting a bail bond, they can only pay 10% of that sum provided that they appear before the court on their trial dates.
Fidelity Surety Bonds
Fidelity bonds offer a safety net for companies and their customers, as they protect them from embezzlement or theft carried out by any of the company’s employees. This surety bond type is well-known among businesses that hire seasonal employees or have many employees who directly manage large sums of cash. Fidelity bonds are also used by businesses that offer delivery and other services that require honesty and good conduct.
Surety Bonds are a staple in today’s business world where work ethics and honesty are valued above anything else. Whether you are a contractor who needs a surety bond to start a project, an auto dealer who requires one to operate, or even an average Joe who just needs a court bond for legal purposes, you should know that purchasing a surety bond is usually a harmless procedure as long as you plan to fulfill your duties. Just make sure that you find a reputable surety company to procure yours.