Surety bonds are designed to act as a guarantee of services. They guarantee that you as a business professional will deliver goods or services. It holds you accountable to fulfill specific obligations that you have agreed to.
A surety bond is normally written with a specific dollar amount. That amount is contractually agreed upon by three parties. The first is the person or business who agrees to fulfill the terms of the contract that is being bonded. The second is the customer or client who will be paid if the contract obligations are not met. Lastly is the insuring or bond issuing provider.
A bond amount is also known as the penalty amount. Because it is the penalty that gets paid if you fail to meet the commitment you agreed to. If you fail to meet the full terms of the contract, the surety bond pays your customer or client. They pay some or all of the total penalty amount your company is insured for.
Surety Bonds Have been around
Surety bond have been around in practice for many years. These bonds and insurance coverage were developed in the late 1800s. Creditors give loans that are secured against physical property. If you fail to repay the loan amount in full, your creditor may elect to seize the building as a form of payment.
Contract surety bonds are generally used by contractors and construction businesses to provide guarantees to their customers. The primary purpose of a is to guarantee that your company will perform at a level that is specified in the bond contract. Construction companies often need a surety bond in order to bid on government contracting assignment. And, having this guarantee helps customers feel more at ease when hiring a company.
Contract bonds can cover a number of contracted obligations. Such as the contract bid, the delivery or completion date, performance levels and payment bonds. Depending upon the coverage you elect for your company and the type of contract you agree to. Surety bonds will cover the costs to your company if you fail to meet any of these types of agreements you contracted for.
For example, if your remodeling company has a performance bond and fails to complete the remodeling of a customer’s home at a specified timeframe. The surety bond will cover your customer’s cost for hiring another company.
Financial bonds include both financial guarantees and payment guarantee bonds. So, a financial guarantee bond is a guarantee that your company will use collected funds in a specified way. For example, if your run a retail convenience store, then you must collect sales tax from your customers. Financial guarantee bonds are a guarantee. They guarantee your company will actually use the sales tax collected from your customers to pay the required sales tax in your state.
Payment bonds are similar but they apply specifically to labor and work materials. A payment surety bond guarantees that the work your company completes or delivers is fully paid for. This bond is meant to ensure customers that the materials you use in completing your contracted projects. Furthermore, they are free from third party liens or encumbrances.