Surety Bonds – Explained in Detail along with the Different Types

The term ‘surety’ in finance describes the guarantee of debts of a party/entity by another party/entity. So, a surety is an organization or person that accepts the responsibility of paying the debt back to the lender in case the original debtor can’t make the payments.

In brevity –

• A surety, also known as a guarantor, is an entity that takes responsibility for another entity’s debt or other financial responsibilities.
• A bond is made as an official document or a contract, where the two parties accept its terms.
• Nowadays, one can electronically file for a surety bond, which is the same as a paper-based bond, except for the medium. 
• Surety bonds are financial instruments consisting of the principal, the obligee, and the guarantor.

This article aims to state some crucial things readers need to know about this bond.

Is this the same as an Insurance Policy?

One needs to understand that these bonds are different from insurance policies. Instead, it is more of an assurance of two parties made to a third party to guarantee debt repayment. So, while insurance policies cover the charges following a loss, surety bonds are more like financial instruments. It acts as a credible assurance that no losses will occur to the lender.

Therefore, any payment made to the company providing the surety bond is paying for the bond sans the principal. The principal is still accountable for the debt. The bond is only required if, for any reason, the obligee needs to be relieved. It recovers the loss or damage to the principal through different means.

Special Note: Note that the surety bond cannot be treated as a bank guarantee. It is because this bond is liable for all performance obligations posed by the principal. On the other hand, a bank guarantee is liable for the financial obligations of any contracted project.

The Different Types of Surety Bond

Contract Bonds

It is one of the most common bonds out there, used to protect the obligee if the contractor fails to abide by the contract-signed duties. These are used chiefly before and during a project bid or, sometimes, during the project itself.

Commercial Bonds

These are required by government or industrial bodies. Usually purchased by big brands, the bonds guarantee some aspect of the principal’s occupation. The type of bond bought will depend on the work of the principal.

Fidelity Bonds

These bonds protect employers against losses or fraudulent acts of dishonest employees. Companies assigning employees to handle cash or valuable assets should definitely consider this bond.

Are there any Benefits of Electronic Surety Bonds?

As said before, electronic bonds are just the same as paper bonds, with a change in the medium of execution. Paper-based ones usually had anomalies like they were harder to get, filled with spelling mistakes and other errors. 

The advent of electronic bonds changed the scenario. Besides, it is also the faster option for those who want to avoid the process dragging on for weeks and months.

Wrapping Up

Considering how fast the process is, choosing to electronically file for a surety bond is the better option. To recall, the surety bond industry embraced the digital way of completing contracts in early 2016. Since then, digital copies of bond agreements have made them more convenient and accessible for both parties.