Surety bonds can be a confusing part of the process of setting up your business. Most people have never heard of surety bonds before someone requires them to get one. So, they are unfamiliar with the purpose of surety bonds and why exactly they need one. In this article, we’ll break down what a surety bond does for your business and why it’s a good idea.
Surety Bonds Provide Protection for Other Companies
These bonds are effectively a form of liability insurance. If a company or government (the obligee) agency hires you (the principal) to complete some kind of work, they’re counting on you to do that work effectively and legally. If you do poor work or break laws while doing it, then the obligee could wind up on the hook for damage they didn’t cause. Without some kind of protection against this possibility, many projects simply wouldn’t happen. These companies or agencies would only hire long-standing companies with sterling records, which would drive competition down and prices up.
This Is Why So Many Industries Make their Contractors Get Bonds
With this protective measure in place, obligees can rest assured that you have some skin in the game. If you don’t complete your end of the work, then the people who hired you aren’t hung out to dry. They can then make a claim on your bond and get paid back. The third party (the surety, that’s us) that you buy your bond from pays the obligee and then comes to you for reimbursement. The reason why the surety is so important is that many principals wind up not having the funds to reimburse them. In these cases, the surety pays out of its own pocket for the damages. This provides an extra level of security for the obligees; even if the principal can’t pay, the obligee won’t have to suffer.
They Can Protect Your Business, Too!
While most surety bonds are primarily for other parties’ protection, there’s a special type of surety bond that can protect your company. Fidelity bonds protect the company if one employee acts poorly or does something illegal. Many companies choose to get these bonds if they work in the financial industry or another industry where employee theft is quite possible. If you have a lot of employees, getting a fidelity bond is a really good idea.
