What’s in this edition:
- What is a surety bond?
- How do you buy one?
What is a surety bond?
Surety bonds are a type of contract that involves three parties: the person or business that needs the bond (known as the principal), the entity requiring the bond (known as the obligee), and a third party that provides the bond (known as the surety).
The purpose of the bond is to provide financial protection to the obligee in case the principal fails to fulfill their obligations or commitments. For example, if a construction company hires a subcontractor and fails to pay them, the subcontractor can make a claim against the bond to recover their losses.
The surety is responsible for ensuring that the principal fulfills their obligations and may be required to pay the obligee if the principal fails to do so. The surety will typically charge the principal a fee for providing the bond, and the cost of the bond will depend on the bond amount and the perceived risk involved.
In essence, a surety bond is like an insurance policy that provides financial protection to a third party in case the principal fails to fulfill their obligations. It’s a way for businesses and individuals to demonstrate their trustworthiness and financial responsibility, and to manage risk in various transactions.
How do you buy one?
First, surety bonds can differ by state. Each state has its own regulations and requirements for surety bonds, and the specific bond types, bond amounts, and bond forms can vary from state to state.
For example, a contractor’s license bond in one state may have a different bond amount or renewal period than in another state. Additionally, some states may require specific bond forms to be used, while others allow for more flexibility in the form used.
It’s important to research the specific surety bond requirements in your state to ensure that you obtain the correct bond type, amount, and form that is required for your particular situation. Then search the authorized agents with the SBA to find a broker near you.