What is a Surety Bond?
Surety Bond Definition
A surety bond is a binding contract between three different parties, which include the principal (the one who needs the bond), the surety (the company who writes the bond), and the obligee (the entity requiring the bond). It provides a guarantee to the obligee that the principal will conduct themselves per the terms outlined in the surety bond.
If the principal fails to complete the task or obligation, the obligee can file a claim against the bond for damages. If a claim is deemed valid, the surety reimburses the obligee.
Any claims must be repaid by the principal to the surety—as outlined in the indemnity agreement that every bond holder must sign.
Don't have the time to read about surety bonds below? Watch our quick 90-second video which covers how surety bonds work.
What is a Surety Bond Used For?
A surety bond's primary purpose is to protect government entities and the general public from financial loss and other damages. If the bond's requirements are not met, such as not performing contracted work or failing to pay suppliers, vendors, or subcontractors, a claim may be filed against the bond.
"What's a Surety Bond?" Infographic
Do I Need a Surety Bond?
You only need a surety bond if you're being required to obtain one, which you will be notified of depending on the circumstance. There are thousands of surety bond requirements across the U.S. for varying reasons and occupations. Find your state’s surety bond requirements today.
Types of Surety Bonds
In general, three categories of surety bonds exist that may be required as part of doing business. The most common types of surety bond include:
License and permit bonds - these types of bonds are required for various professionals to operate legally. Auto dealers, licensed contractors, and freight brokers are some examples of professionals required to secure a license or permit bond.
Contractor bonds - individuals or businesses working on public construction projects and government contracts are likely required to obtain a contractor bond. This includes construction bonds, bid bonds, and maintenance bonds.
Court bonds - certain courts require these bonds for various purposes, such as probate or judicial bonds.
If you need help finding you surety bond, check out our Find a bond tool.
How Does the Surety Bonding Process Work?
Bonding is generally an easy process with a handful of simple steps. Here is what you can expect from the bonding process.
- Fill out a bond application for our in-house underwriters to assess.
- Once your bond is approved, you will get a free quote and an indemnity agreement.
- Sign the agreement and email or fax it back to your bond provider.
- Pay the invoice online.
You will receive a copy of the surety bond in an email once everything is processed. Additionally, the original bond will be sent to you in the mail.
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Surety Bond Example
Here's a quick example of what a surety bond is used for in the case of contractors.
Need for a Bond
Let's say a business owner (the principal) has just moved to Georgia and wants to start a small business in the construction industry. He decides he wants to be a general contractor. However, the State of Georgia (the obligee) dictates that you need a general contractor license to take on construction contracts over $2,500. There are many requirements to obtain this license, and one is a $25,000 contractor surety bond that acts as a financial guarantee.
Applying for a Bond
The business owner applies for a bond through a surety company (the surety). A quick underwriting process assesses how much of a risk he is by looking at factors like his credit score, financial statements, previous bond history, and moral character. This business owner is an excellent candidate and secures a surety bond premium of 2%, meaning he pays a flat fee of $500.00 to obtain the bond from the lender.
Claim Against a Bond
The business owner’s application is a success. They now have a General Contractor Limited Tier License, which means he can take on work with a contract price of up to $1,000,000. Fast-forward half a year later, and it is found that his workmanship on a residential home is faulty. It isn't the standard agreed upon in the contract between him and the project owner. The project owner puts in a claim against the bond. The investigation finds that the business owner failed to uphold their contractual obligations, so the surety pays out to the project owner. The business owner is now on the hook for paying back the surety.
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How Much Does a Surety Bond Cost?
A surety bond generally costs 1-10% of the full bond amount. So, for example, if you need a $20,000 bond, your costs could be anywhere between $200 - $2,000.
The cost of a surety bond varies drastically depending on the bond amount you need and your rate. Your rate is determined by an underwriting process. An underwriter will look at your financial statements, credit score, and past bonds to determine your financial strength.
Do you have bad credit? It's still possible to get a surety bond with bad credit, but its premium will likely increase.
You can use our bond premium calculator to get an instant estimate. If you need to get a firm surety bond quote, you can apply to get an online approval.
The Consumer's Guide to Surety Bonds E-Book
If you want the most thorough answers available to all of the fundamental questions related to securing a surety bond, download our free "Consumer's Guide to Surety Bonds" e-book. Topics covered in the e-book include:
- How surety bonds work
- How indemnity agreements affect you
- The various surety bond types required
- Surety bond pricing
- How to get bonded
- How claims affect you
This e-book was designed to educate consumers, specifically first-time applicants. It is an excellent resource if you are unfamiliar with how surety bonds work, the pricing of surety bonds, or how bonds affect you or your business.
All You Need To Know About Surety Bonds!