The purpose of surety bonds
The amount of risk in a business deal can both attract and dissuade potential investors. If you choose correctly and get in early, you stand the chance to make back your money and then some; but if you invest in a risky venture that goes south, you lose everything. Many organizations, for example, those in the construction industry, require surety bonds up front from contractors and partners before forging ahead with a work agreement.
The bond is a written agreement between a surety company and the contractor, also referred to as the principal, and guarantees the hirer, or obligee, that if the contractor is unable to meet the duties of the contract, the surety company will reimburse the obligee for a portion of those lost funds and earning potential.
Surety bonds act as safeguards
Calls for bids, especially those from a federal organization, often require proof of a surety bond for eligibility. If the value of the contract is particularly high, or there is an extensive amount of work to be done, project owners will want to safeguard against any liabilities that may occur due to this partnership.
When a company selects the winning bid, a considerable amount of time and upfront resources are poured into the project to give the contractor everything they need to successfully complete the project as outlined. If surety bonds didn’t exist and the contractors were unable to hold up their end of the deal, the hiring organization eats those costs. Therefore, companies require a surety bond before moving forward as a way to recoup initial investments should things not go as planned; additionally, contractors pay the surety company an annual fee in order to benefit from their strong credit standing and guaranteed backing.
Applying for a surety bond
The Small Business Association’s website is a great resource for companies looking to obtain a surety bond as they begin the bid process. You can work with an insurance agent to compile your business plan and other supporting materials, including financial statements and history of successful completed contract work, to give to the underwriter of your chosen surety company.
These will help strengthen the reputation of your business in the eyes of the surety company, and increase the likelihood that they will back you in ongoing contract bids. This relationship is crucial if your business regularly submits bids for government or other corporate contracts.