Occasionally, when a lot of money is on the line, your word that you'll do something may not be good enough. Surety bonds back up your word. A surety bond is a form of insurance that pays out if you – or any individual undertaking a fiduciary or contractual responsibility – fails to perform as promised.
Who Needs a Bond?
Large construction projects often require bonds for architects or other professionals who are integral to their completion. A performance bond guarantees that these individuals or companies will do the work they've contracted to do. A payment bond guarantees that they'll pay their suppliers. Some states require that executors of probate estates or trustees of trusts secure bonds ensuring that they'll act in the best interests of the decedent and beneficiaries – they won't take any action that would cause the estate to lose money. Some public officials require bonding as a requirement of accepting their positions. Surety bonds can post bail for criminals – usually through a bail bondsman who is insured along with the principal. They can also guarantee aspects of civil lawsuits, such as that the parties will pay any eventual judgments. Some employers, such as banks and cleaning services, bond workers to protect themselves if they should steal or commit some other wrongdoing against customers.
Who Issues a Bond?
Insurance companies issue surety bonds. If the principal – the person who has promised to perform – fails to act or do as promised, the surety company compensates the obligee for the insured amount. The Small Business Administration guarantees surety bonds for smaller companies that may not have a sufficient track record to qualify with a private insurer. The SBA doesn't actually issue these bonds itself – it only promises that if a claim is made and if the small business can't compensate the surety company for the claim, the government will pay it instead.
Can Anyone Get a Bond?
Like any lender, surety companies prefer principals who are good risks. They look for both superior credit and a proven track record. Fiduciaries and public officials should have good moral character. Those accused of a crime should have a clear reason not to flee town before trial. This isn't to say that a new business owner who is just starting out or an individual with poor credit can't get a surety bond, but they'll pay more. Surety companies group principals into two categories: Standard or low-risk, and high-risk. If you fail to perform as promised, the insurer can collect from you any sum it had to pay to the obligee as a result of your lapse.
How Much Does a Surety Bond Cost?
Surety bond insurers charge a non-refundable percentage of the amount of bond you need. They percentage is based on the likelihood that you'll default on your agreement, as well as your anticipated ability to repay the surety company if you default. Low-risk contract and commercial bonds can run from .5 to 4 percent. Extremely high-risk bonds can go as high as 20 percent. Fidelity bonds – those that cover employees – can vary, depending on how many employees require coverage. Bail bonds typically run about 10 percent of the bail amount.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.