Surety Bonds—Why You Need One

Surety bonds are very common for contractors, but others doing business that involve contracts often need them. Here is a look at what surety bonds are, when you need one, and how to get one backed by the SBA.

What Is a Surety Bond?

Surety bonds are a type of business bond, in effect an insurance policy between a contractor, a client and a bond company. They serve as a contract between these three parties:

  • The party who must perform, called the principal
  • The party for whom the work is being done, called the obligee
  • The party who insures the action of the principal, called the surety

What the bond does is pay the bond amount to the obligee if the principal doesn’t do the job. The purpose is to give the obligee enough money to finish the job using another company.

Bonds are easier to deal with, especially for a small company, than putting up cash as a guarantee that the work will be finished.

When Do You Need a Surety Bond?

Surety bonds are often required by the terms of a contract to guarantee your performance. This affects you if you are a contractor, supplier or manufacturer.

One common example would be a paving contractor. If he bids to pave the parking lot around the visitor center in your town, he will usually be required as part of the contract to carry a surety bond. This will pay the town if he fails to finish the contract. If that happens, the town can uses the amount of the surety bond to get the work done by another paver.

The SBA Surety Bond Program

The Small Business Administration, or SBA, has an Office of Surety which has a number of programs that can help small companies. It handles two programs that provide the guarantees needed for small and emerging firms that meet their surety bond requirements. The bonds are privately issued but guaranteed by the SBA.

The way it works is that the business obtains a bond from a surety company. This bond is guaranteed by the SBA. This h makes it possible for the bond company to do business with the small firm. Often new firms don’t have the right track record to qualify for a bond otherwise.

The SBA Office of Surety keeps a list of approved surety bond companies that small firms can use. Applications are easy to send electronically.

That said, you can work with a small business insurance agency to make sure you are protected with a surety bond.