What is a Surety Bond?
Most small business owners have heard of a small obscure financial product called a surety bond. However, most also don’t know what it is beyond the fact that the government requires one. It’s the “bonded” part of being “licensed and bonded” as a small business.
A surety bond is in essence a three way contract between a principal, obligee, and a surety company. The principal is the person who will perform certain duties outlined in a contract. The obligee is a person or part who is benefiting from said duties and requires protection to ensure completion. The surety is a third party that “vouches” for the principal in case the principal fails to fulfil its obligations.
Surety bonds are most often used in service based business where there’s some form of up front payment followed by a service and a final payment. One example is a construction performance bond. Often times, construction projects are paid at certain intervals as the principal meets certain goals. Obligees don’t want to risk having issues with completion so generally they require the principal have a surety bond to cover the cost of getting a new contractor should a project go awry.
Here’s a short list of other industries and professionals that commonly are required to have surety bonds to operate:
-Auctioneers
-Auto Dealers
-Contractors
-Custodians
-Health clubs
-Hunting Guides
-Insurance Brokers
-Janitorial Businesses
-Notaries
-Payday Loan Stores
-Telemarketing Companies
-Travel Agents
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