Surety bonds are commonly used across various industries in the United States to help build trust during business deals. Alpha Surety Bonds services can guide you in showing that someone will keep a promise made in a contract. There are different types of surety bonds depending on your job, state, and what you’re trying to do. That’s why it’s important to understand what they are and which one you need.
What Is a Surety Bond?
A surety bond is like a financial promise. It gives your client peace of mind. It says you will do what you promised in a contract. If not, the client has the right to recover their losses.
Governments and financial companies often require these bonds when hiring contractors for big jobs, like construction projects.
How Surety Bonds Work
A surety bond is a three-way agreement:
- The Principal is the person or company doing the work (like a contractor).
- The Obligee is the person or group who needs the work done (like a government agency).
- The surety is the company, usually an insurance or bonding firm, that guarantees payment to the obligee if the principal fails to complete the work.
The surety promises to pay a certain amount, called the penal sum if the principal doesn’t follow through. To get this bond, the principal pays a premium, similar to an insurance fee. If something goes wrong, the surety pays the obligee, and then the principal must pay the surety back.
When Do You Need a Surety Bond?
You usually need a surety bond if you’re working on a government project or applying for a professional license. For example:
- Construction companies need them to work on public projects.
- Car dealerships need them to get a license to sell cars.
- Businesses in industries like alcohol, agriculture, and travel often need bonds to abide by rules and protect consumers.
A federal law called the Miller Act requires surety bonds for any federal construction contract over $150,000.
Types of Surety Bonds
There are many types of surety bonds, but they generally fall into four main groups:
1. Contract Bonds
These are common in the construction industry. They help clients trust that the contractor will do the job. Types of contract bonds include:
- Bid Bonds – These promise that a contractor will stick to their bid and sign the contract if they win the job.
- Performance Bonds – These guarantee the contractor will do the job as agreed in the contract.
- Payment Bonds – These ensure workers, suppliers, and subcontractors get paid.
- Supply Bonds – These promise that materials will be delivered as agreed.
- Maintenance Bonds – These act like warranties, promising that the contractor will fix issues after the job is done.
- Improvement (Subdivision) Bonds – Required by cities for developers to finish certain public improvements like sidewalks or sewer systems.
2. Judicial (Court) Bonds
These are used in court cases. They protect people involved in legal disputes. Some examples include:
- Bail Bonds – Ensure someone appears in court.
- Appeal Bonds – Protect the winner in a lawsuit if the losing side appeals and delays payment.
- Mechanic’s Lien Bonds – Help protect a property owner when a contractor files a lien for unpaid work.
- Attachment Bonds – Protect a defendant if a plaintiff tries to seize their property.
- Injunction Bonds – Protect someone incorrectly stopped from taking an action by court order.
3. Probate Court Bonds
These bonds are used when someone is managing another person’s money or estate after they pass away or if they can’t do it themselves. The person in charge is a fiduciary and must act in good faith.
- Fiduciary Bonds (or probate bonds) guarantee that the executor or guardian will manage money or assets honestly and follow the law.
4. Commercial Bonds
These are used by businesses and professionals in many industries. Some common types are:
- License and Permit Bonds – Required before some businesses can legally operate (like car dealers or health care clinics). They ensure the organisation follows the law.
- Public Official Bonds – Used by public workers like notaries or judges to show they’ll do their job properly.
- Business Service Bonds – Protect clients from theft or damage caused by an employee of the business. For example, a cleaning service might get this bond to protect their clients.
Some businesses also use surety bonds for other needs, like:
- Replacing a lost financial document
- Guaranteeing workers’ compensation payments
- Securing a lease
How To Get a Surety Bond
The process can vary, but here’s a basic outline:
- Find Out What Bond You Need – Check your state and industry requirements. Some bonds are specific to certain locations.
- Choose a Trusted Surety Company – Ensure the company is licensed and has experience. The U.S. Small Business
Administration (SBA) has a directory of trusted agencies. - Undergo a Financial Check – The surety company will check your credit score and business finances to assess risk.
- Pay the Premium – You’ll pay 1% to 15% of the total bond amount. If the SBA backs your bond, there may be an extra fee, but approval is often easier.
- Get Your Bond – After signing the paperwork and paying, you’ll receive your bond—sometimes immediately.
- Submit Your Bond – Give it to the agency or client that requested it. You’re now ready to start your project or business.
Common Questions
- How much does a surety bond cost?
The price depends on your business and the bond amount. It’s usually between 1% and 15% of the bond total.
- What happens if someone files a claim?
If you don’t do your job properly, the client can file a claim. The surety company pays them, but you must pay the surety company back.
- How is it different from insurance?
Insurance protects you or your business. A surety bond protects your client if you fail to deliver what you promised.
- Is there a bond required for all industries?
Yes. If your company manages an employee benefit plan, you’ll need an ERISA bond. This protects employee benefits from fraud.