It is important to understand that in its most basic form, a surety bond is a legally binding document that tells your employer or client that a your company has a good history of completing contacts and works on time, on budget and within all the limits of the law. In this article we will explore the main aspects of surety bonds for businesses that have never needed one and how they work.
- A surety bond is not a policy that will benefit your business in any way. It is a policy that is in existence to protect your project manager, your clients and the general public should something go wrong whilst you are under contract.
- In some states, if you have the cash available, you can become self bonded. Talk to your local bank branch about how to set up your own bond policy if you do not wish to use the services of a bond broker.
- If your state requires you to have a bond in place by law, you cannot legally operate your business until such time as you have bond policies in place. If you are just starting your business and are unable to afford a bond policy, some states allow a letter of credit in its place until such time as you are able to purchase a bond.
- A surety bond may be in place to pay a specific sum of money to an employer should you break the contract early. This is known as a penal sum, and your bond policy amount should be equal to, or higher than this sum to ensure that your business does not suffer financial hardship in having to find large sums of cash should this occur.
- Although extensive checks are carried out on any business applying for a surety bond for the bond issuer to see if your business is reliable and has a good financial and completion history, a surety bond is in no way a guarantee to your employer that you will finish out the term of your contract, it is a only a guarantee that no financial hardship will be suffered by the owner should your company fail to meet the conditions set out in the contract.
- A surety bond is not an insurance policy, but rather a legal guarantee that if, for any reason, you fail in your contractual obligations, the owner or client is not responsible for any financial loss that may have been caused by you or your employees.
- If a claim is lodged against your bond, the bond company will investigate to ensure that the claim is legitimate. Any money that your bond pays to settle a debt must be reimbursed to the issuer at a later date.
- Your business will still need to have public liability insurance to cover any kind of accidental damage that may be caused whilst you are working on your contract. Your bond does not cover breakage and damage, rather protects financial loss through unethical behavior or failure to comply with contractual terms.