The Different Types of Commercial Surety Bonds

A surety bond can be defined as a promise that a guarantor makes to two different parties. One party is represented by the obligee, and the second party is represented by the principal. If the principal is not able to respect the promise towards the obligee by following the terms set in the contract, the obligee will receive a certain amount of money from the surety (guarantor). From the definition, a surety bond can happen between three different parties: the obligee, the principal and the surety. The benefits of applying for a surety bond are getting financial protection in a commercial transaction, getting financial assurance that is required due to government pressures and being protected from fraud or non-performance. Next, it is important to state who can use a surety bond and with what sort of purpose. See guarantor definition.

Usually, the businesses that choose surety activate in fields where this type of guarantee between parties is a necessity. For instance, contractors, retailers, auto dealerships, travel agencies or real estate agents can make good use of a surety bond. The process for application include just a few steps. Business owners can be required to get surety bonds by a government agency or a private entity. When obtaining a bond through a company, businesses will only have to apply online and fill in a form with the required information. Surety bonds come in various types, each one focused on a certain purpose. This article is meant to shortly describe each type and give several examples of surety bonds that businesses in all domains can apply for. Here’s the list:

Commercial bonds

Non-contract bonds (federal government)

Non-contract bonds are usually required by the federal government, meaning that they are not something that the business can choose. Non-contract bonds can be applied to medical care providers, immigrants, alcoholic beverage distributors and so on.

Public official bonds

In the case of public official bonds, they set limits between how the performance of duty of a public official is completed and the other party. These are usually selected by treasurers or tax collectors. Such surety bonds can also prove to be helpful for judges, court clerks or notaries.

Judicial bonds (fiduciary bonds)

Fiduciary bonds are based on court orders and they refer to fiduciaries’ duties. This type of surety bond is useful for administrators and executors. Its use can be illustrated the best when representing the trustees of a will or similar cases.

License & Permit bonds

This is a surety bond that is applied by law or the regulations in a respective state, in the sense that a permit or a license should be obtained in order to perform and engage in certain activities. The license & permit bond is used by auto dealers, security dealers, employment agencies and other types of businesses listed in the country’s law.

Subdivision bonds

This is a specific type of surety bond that has to do with the principal of a city, country or state. Through this bond, the principal guarantees the construction of certain improvements that are related to the respective location – streets, sidewalks, sewer, drainage systems and other kind of investment-based changes.

Miscellaneous bonds

Miscellaneous bonds include commercial surety bonds used with various purposes, from ensuring leases to guaranteeing a monthly payment, such as utility bills or rent. In most cases, miscellaneous surety bonds are useful for private relationships or businesses that have specific needs.

Contract bonds

Contract bonds are encountered often in the construction industry. The category of contract bonds contains several subcategories, each focused on a specific case. Here is a short description of the most popular ones:

Bid bonds

Bid surety bonds are used to ensure the bidding process. Both the bidding contractor and the bidding supplier prove to be qualified for respecting the requirements stated in the contract. The bond is popular for avoiding any kind of frivolous bid. The principal will only enter into the contract when the bid is awarded.

Performance bonds

Similar to bid bonds, performance bonds are used by insurance companies or banks in order to guarantee the completion of a project. The contractor is the one who has to complete the project in the previously set parameters. If the contractor doesn’t issue the bond, the client will be given a financial compensation.

Payment bonds

This type of surety bond is set between contractors and subcontractors. The contractor ensures that the subcontractors and any other suppliers involved will get paid after the completion of the project. They are highly related to performance bonds.

Maintenance bonds

Finally, the maintenance surety bond is an assurance set between a manufacturer and a consumer. It is a simple form of a contract that states the manufacturer promises to make changes in the future in terms of maintenance.

Business service bonds

Business service bonds refers to the surety bonds that protect clients from theft. These are usually selected by people or businesses that often use services that involve entering a private property for performing different types of routine services such as cleaning or medical care. For instance, in the case of janitorial services, a business service bond is necessary for ensuring the client that he will receive a financial compensation in case something goes missing after the other party performs the respective services. The bonded entity is required to justify in front of the court of law in case something has been stolen. Business service bonds are not the same as fidelity bonds.

Final thoughts

All types of surety bonds serve for a certain cause. From business bonding to miscellaneous bonds, people can choose from a variety of types in order to ensure that everything will go as initially planned. Getting informed about each type can save both businesses and people a lot of trouble when closing a contract. When the principal’s failure to meet the requirements stated in the contract, without a surety bond, unpleasant consequences can occur. Surety bonds are recommended whenever the situation fits.