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Want to know the details about a surety bond and all that it has to offer? Find out more about this legally binding contract and obtain a helpful business resource.

If you’re new to the concept, you might still be asking, what is a surety bond? Simply put, a surety bond is a legally binding contract that also works as a guarantee. There are three parties involved in the process and the bond ensures that all the parties meet the obligations.

Parties Involved:

This contract is between three parties, which are as follows:

  • The Principal 

This is the party that is required to obtain the bond. In most cases, the principal is a business that applies for a license or contractors that have won a tender. The parties need to post a surety bond before starting any work on the project to ensure their commitment.

  • The Obligee 

This is the party that requires the principal to obtain the bond. They may ask the principal for the bond before getting a permit or a license for work. Usually, the obligee is a government agency that uses the surety bond system to regulate any industry. 

  • The Surety 

This is the party that guarantees that the principal can fulfill the obligations stated in the surety bond. They provide the financial guarantee that in case the principal fails to oblige to the agreement, they’ll cover the losses. In order to get this guarantee from the surety, the principal has to pay a premium to the bonding company. 

Types of Surety Bonds

There are three major types of surety bonds that provide the public the convenience they need to obtain licenses and permits. 

  • License and Permit Bonds

These are also known as commercial bonds and account for the majority of surety bonds. They are a part of licensing requirements for many businesses. These bonds provide the guarantee that the issuer will abide by the rules of the business and industry and fulfill their financial obligations too.

  • Contract Bonds

Contract bonds are usually used for construction projects and are a promise that the project will be completed according to the terms decided prior to the contract. This is also a guarantee that the contractor will follow all the rules and regulations.

  • Court Bonds

Wherever there are issues of guardianship of estate, court bonds are used. These are typically a guarantee that the money will be used according to the terms of the bond. This legally binding contract ensures that estate and guardianship rules aren’t violated in any sense. 

  • Fidelity Bonds

This bond ends the list of the types of surety bonds. Even though they are not mandatory, many businesses prefer them. Fidelity bonds provide protection to businesses from issues such as employee dishonesty, theft and embezzlement. 

Conclusion

This information can easily answer your question, ‘what is a surety bond?’ So, if you need to provide a guarantee for a business transaction, you know what route to take.