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What Small Business Owners Need to Know About Surety Bonds

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Surety bond represent an insurance policy for the party that is investing money in a certain project. In contractor’s world this party is often called the obligee. These bonds protect obligee’s interest and make sure that all project services are delivered in a timely-manner and in accordance to the contract or government standards.

These bonds are paid and guaranteed by contractors and can be bought from surety companies. If something goes wrong with the project, surety company pays for its completion, but also claims the amount of contractor’s funds or assets that were required for project completion (plus legal fees). This way an obligee receives everything they paid for, while a contractor is protected from false claims and law suits that might occur when project is brought to a halt.

Different types of surety bonds

There are several different types of surety bonds and not all of them are involved with construction business. Most surety companies share their bonds in three major groups:

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  1. Contractor’s bonds
These are bonds required for construction projects. There are several types of contractor’s bonds, each one being specialized for certain project phase or sub-contracting engagement. There are:
  • Bid bonds — Allow contractors to bid on projects, and unlike other contractor’s bonds, they protect the public instead of a specific obligee.
  • Performance bonds — Buying these bonds allows contractors to perform work on awarded project.
  • Payment bonds — Make sure that contractors will pay their laborers, subcontractors and suppliers.
  • Maintenance bonds — Contractors who work on projects that require warranty need to purchase these bonds, which guarantee that maintenance tasks will be done in accordance with the contract.
  • Supply bonds — These bonds are created for suppliers and they guarantee that ordered materials will be delivered in full.
Contractor’s bonds are required for all public projects under state, federal and county jurisdiction and are often required by obligees in private projects that exceed certain sums.
  1. License bonds
License bonds are required by local, state and federal authorities for obtaining work licenses in various service-oriented industries. They work on a similar principle as contractor’s surety bonds. License bonds guarantee for whole company’s work and view it as a single project. In this arrangement, government and general public (to whom company provides its services) are seen as obligees. License surety bonds can be issued to various service businesses, including: retail stores, auto dealers, freight brokers, contractors etc.
  1. Commercial bonds
All other surety bonds are listed under ‘commercial bonds’ category. Some of the popular types of commercial bonds are:
  • Fidelity bonds — Protect customers and companies from employee theft.
  • Court bonds — Ensure that respondents fulfill their responsibilities, ordered by the court of law.
  • Public bonds — Protect the public from wrongdoings of individuals who are elected to public functions.[/message][su_spacer]

How small business entrepreneurs can use surety bonds

Although surety bonds are viewed as an unwanted necessity by most entrepreneurs (especially in the construction industry), they actually bring a lot of benefits to small businesses. License bonds ensure that company’s business is done in accordance with government standards, and therefore it protects the company from customer claims, liquidation and bankruptcy. Furthermore, these bonds protect company’s reputation and enable them to continue running their business, even after major incidents.

That’s why contractors have a free hand over their funds, which they can use in full when something goes wrong with the project. It is also known that surety companies will charge their claims in accordance to the real cost of project completion, which is not the case with false claims and various other ways obligees use to overcharge their expenses. It is easy to notice that surety bonds are the best option for ensuring project completion, especially when they are compared with other types of guarantees, such as 100% collateral.

Small business entrepreneurs should also oblige their business partners and sub-contractors to buy surety bonds for projects where they act as investors and obligees. This way they will receive full protection of their invested assets and they won’t need to worry that slow or incomplete project completion will affect their business.

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Sonya Watts
Sonya Watts
SONYA is a passionate business consultant from Melbourne, Australia with five-year experience. She has a wide range of interests, including online writing, technology trends and marketing in general and likes to share her own experiences in those fields.

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