There are good reasons for you to use a surety bond to protect your investments, such as promissory notes, deeds, money orders, stocks, etc.
However, a surety bond is mostly utilized in contractual government or private projects like construction or development. But it can also be one of the best ways to protect your personal investments too.
Surety bonds are still unfamiliar to many, so don’t be shy to dig into this financial aspect which can potentially save you from financial ruin.
In this short article, we’ve tried to run down a few vital reasons why you should utilize a surety bond and the practical benefits you’ll get from it.
Let’s check out below what a surety bond is, the reasons to use it, and some other relevant aspects.
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What Is a Surety Bond?
A surety bond is a three-party contract where one of the parties agrees to take responsibility for a loan, debt, or default. It’s a written agreement that guarantees the performance or payment of an act or project.
Surety bonds are prevalent in various business and industrial operations, such as Maritime Surety Bonds, Admiralty Bonds, Construction Bonds, etc.
A surety bond consists of three parties. The three parties are:
- A surety company – 1st party.
- A principal – 2nd party.
- An obligee – 3rd party.
The above three parties make the surety bond function as below:
The second party or the principal buys a bond to guarantee the promised payment or performance.
Then the first party or the surety company (essentially an insurance company) guarantees that the promised obligations will be fulfilled. If the principal fails to meet the obligations, the surety company will be liable to comply with the obligations.
The third party or the obligee benefits the most out of the surety bond as it sells the bond to the principal.
In most cases, the obligee happens to be a government, state, federal, or local organization. And most surety bonds are issued to facilitate any license-related state requirements or accomplish a government contract.
Businesses and industries that acquire a license need to fulfill specific federal or government requirements. Hence, they collect the finance from the government or federal system through surety bonds.
4 Reasons behind Using A Surety Bond to Protect Your Investments
Surety bonds are critical for businesses nowadays. It secures ongoing projects and social accountability. Furthermore, it helps you comply with the state and federal statutory requirements, which are obligatory to run the business.
A surety bond may work within an organization to enable more impact investment, which in other words, means investing in areas that also fulfill the social responsibility of a business.
Let’s check out below four technical and practical reasons behind using a surety bond while protecting your investments:
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Safeguarding Projects
A surety bond safeguards public construction projects by ensuring proper maintenance, obligations, and accomplishment of the project.
In almost all cases, surety bonds are an inviolable requirement for participating in public infrastructure projects. Thus, if you want to invest in this sector, there is no better way to comply with regulations and protect your investment.
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Compensating Obligee
You must agree to compensate your client or the obligee in case of failing to accomplish the project in due time. Such failures cost your client time, money, and resources. Hence, a surety bond comes into the roleplay of compensating the lost resources for your client.
This can help you by making you appear more reliable and trustworthy to existing as well as potential clients.
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Extending Finance
Many projects can run into financial trouble halfway along the way. If you want to evade such risks, you can utilize a surety bond.
Having a surety bond makes you a reliable party who’s eligible in the investors’ eyes to receive a sponsorship extension.
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Being Compliant with Statutes
A surety bond ensures compliance with the project’s regulatory terms and conditions.
Whether you’re the contractor or the government, a surety bond sees through to the end of the project. It helps the obligee to get its project accomplished timely and resourcefully.
What are the Types of Surety Bonds?
Surety bonds are of various types to facilitate a business project from many aspects. The surety bond types are based on their functional categories, such as:
- License and Permit: It confines the businesses to work and accomplish a project within the conditional boundaries.
- Performance: It regulates the contractors so that they run and complete a project ensuring optimum performance.
- Commercial: This basic surety bond regulates the principal’s commitment and actions to accomplish various project responsibilities.
- Bid: It secures the project bidding while assuring the project owner of a compliant performance by the project bidder or contractor.
- Subdivision: It ensures that a property developer will fulfill the development project by meeting the terms and conditions in the agreement.
- Payment: It covers the compensation security for the subcontractors, suppliers, and vendors related to the particular project.
4 Benefits You Can Acquire by Utilizing a Surety Bond
A surety bond reflects and establishes the integrity, honesty, and financial capacity of a business by bringing three parties into an agreement. It covers everyone: from the contractor to the obligee and from the subcontractors to the vendors and suppliers.
Below we’re going to share four efficiencies and benefits of utilizing a surety bond in various businesses and industries:
- Protection of Stakeholders: A surety bond secures the payment of every party involved in a project: suppliers, laborers, vendors, subcontractors, etc. This can be especially useful for retailers using ERP system.
- Establishing Customer Bondings: As a surety bond is signed, the customer feels confident in the contractor or business’ financial capacity. In other words, the financial aspects are guaranteed by the surety bond.
- Safe and Secure Agreement for All: A surety bond paves a clean and transparent road for the stakeholders of the project. Anything that turns up as a claim can meet the bond’s terms and conditions to clarify any doubt and misconceptions. It ensures a sense of responsibility in everyone.
- Handling Post-Project Risks: A surety bond doesn’t exhaust its utility with the project completion. Its conditions and security may last up to a year, and if anything issues turn up, they can be settled as required.
Is Surety the Same As Guarantor?
A surety, being a person or an organization, is a guarantor in general since they promise to pay the obligee in case of a defaulter in an ongoing project.
However, a guarantor is a party that backs a credit, loan, mortgage, etc., for the debtor. In contrast, a surety bond can cover so much more. Hence, the role that a typical guarantor plays is much more limited.
Moreover, guarantors can often choose to provide a guarantee free of cost, especially for family and friends. But that is rarely the case with surety bonds. They almost always incur a fee.
Bottom Line
The reasons behind using a surety bond make it a viable tool for securing your financial investments.
Whether you’re a contractor or a government entity, a surety bond can protect you financially in the long run.
It’s very common in construction and developmental projects to stumble upon unexpected financial obstructions.
During moments of such crises, a surety bond can help relieve some of the stress and allow you to move forward with the project and fulfill your legal obligations.
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