What Are Bonds

Surety bonds are a way for companies to have their services guaranteed by a third party. When your company wants to work as a subcontractor for another on a large project, you may find that you are not eligible to even place a bid on the project if you do not have a surety bond in place first. This is also the case with government contracts. Normally no company is allowed to bid on, win, or work with government contracts that are above a certain value when you’re not bonded. This means you risk losing a lot of income and company growth if you operate without having the appropriate bond guarantees in place.

Surety Bond

purchasing bonds

A surety bond is simply a guarantee by a third party. That third party puts money on the line to guarantee that you will provide goods or services as defined in your contract. If you default on the contract then the guarantor will pay your client for the covered losses. Surety bonds are a financial guarantee for the client you provide goods or services to. If your client is a contractor for example, and they contract with your company to deliver building supplies, their company’s reputation relies on your company’s integrity. If your company does not or cannot deliver specified goods on time, the client may be heavily fined for falling behind schedule. That client may also suffer losses in additional income if his company is marked as not completing work on time. Since the delays were originally caused by your company’s failure to deliver on time, that client is likely to sue your company for the losses they suffered.

Surety bonds come in multiple forms and serve a variety of different industries. Common types of bonds include contractor bonds, supply bonds, securities, judicial, commercial and licensing.

Contract Bonds

A contract bond is normally used for construction companies and contractors to offer a guarantee of services to their clients. Construction and contractor companies are unable to bid on or win contracts for government jobs without first having a contract surety bond in place, and they’re also not able to win a sub-contracted position with the primary contractors on these projects. Small consumer clients are more likely to trust contractors who are bonded as well, because they feel that their interests are protected if you do not provide the services you agree to.

Depending upon the setup and structure of your contractor bond, it may guarantee a completion date, guarantee specific deliveries, or guarantee that your company will meet and exceed specified quality standards.

Financial Bonds

A financial bond can be either a payment guarantee or a financial guarantee. Payment bonds act to reassure your customers that you have fully paid for labor or materials that you’re using. In other words, there is not a lien or other financial obligation levied against the materials you’re using. Financial bonds are similar, but they guarantee that your company will use money that is collected for certain things in a specific way. An ecommerce store may collect sales tax for multiple states for example, and a financial surety bond is a third party guarantee that the store will distribute those collected funds to the appropriate taxation departments.

Supply Bonds

A supply bond is a guarantee that a company will deliver specific supplies, goods and products that are specified in the contract. These bonds can be useful for both business to business and business to consumer companies. A construction contractor may require supply bonds from sub-contracted electricians and plumbers for instance.

Other Bonds

  • Securities Bond – This is a way to guarantee that your company will handle valuable or important paperwork properly.
  • Licensing Bonds – In some states, certain kinds of companies must have a professional bond before they will be issued an operating license. These generally fall into two areas:
  • Regulation Bonds – These insure that your company follows standard laws and regulations for your industry.
  • Tax Bonds – These insure that your business will collect any appropriate and required taxes, such as gas tax or taxes for alcohol sales.
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