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paperwork and calculatorIf you’re the new company on the block, what can you do to show consumers that you can be trusted? There’s no substitute for marketing your services to get new customers and performing well to keep them; but that can be difficult when you’re an unknown.

Surety bonds can make a difference by helping your company stand out as trustworthy and able to keep their commitments. They do this by backing up your agreement to perform with the financial integrity of a major insurance company. 

What is a Surety Bond?

When a business enters into a contract, they can show their ability to perform the job or deliver goods and services by purchasing a surety bond. Bonds function similarly to insurance contracts that are endorsed to protect a third party’s interests, but they have a language all their own.

 The "Principal" listed on the bond is the company or individual that purchases the bond to reinforce a promise to perform a service, fulfill a contract or deliver goods.  
 The "Surety" is the entity—usually an insurance company--that underwrites the bond and agrees to pay the penalty if the principal defaults on their agreement.  
 The "Penalty" is the maximum dollar amount of a bond. If the principal fails to perform his contractual obligations, the bond will pay damages up to the penalty amount.  
 The “Obligee” is the entity that requires your contract to be backed up by a company with the financial ability to make things right in the event of a default.

How Surety Bonds Work

Some companies need more than a good faith guarantee. That's why the Small Business Administration urges small contractors to familiarize themselves with surety bonds if they hope to secure government contracts. When a $150,000 or greater federal construction contract is up for bids, it triggers a surety bond requirement.

Many businesses, state and local governments also require contractors to guarantee performance. Designers, developers and other suppliers of goods and services may be required to post bonds as well. When a bid or performance bond is not required, there's little immediate recourse when a contractor defaults.

Surety bonds would have been beneficial after a developer defaulted on a contract for a Springfield, Massachusetts development deal. The city sold the developer a vacant school administration building for $1 with the provision that they rehab it into apartments within one year. They failed to meet the deadline; and with no surety bonds in place, a lawsuit was the city's only recourse.

Types of Surety Bonds

Some surety bonds may be custom-written for a specific situation, but the most common forms cover a wide range of businesses, contracts and situations.

Bid Bond: Contractors must sometimes file a bid bond as a requirement of being allowed to bid. It guarantees that the winning bidder will follow through with the work.

Performance Bond: Once the bid is secured and the contract awarded, contractors/suppliers may be required to post a bond which guarantees that they will fulfill the contract as specified and within an outlined time frame. 

Payment Bond: Some states require businesses, such as trucking companies, to file a bond guaranteeing that they will pay incurred taxes.

Prove your trustworthiness. Call La Famila Insurance at (888) 751-7511 for more information on Dallas surety bonds.

Posted 12:15 PM

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