Commercial Bonds Information

If you are a contractor, you want to promise your clients you’ll look after them if you can’t complete your work. One of the most assured ways to do so is through offering surety bond options. Bonds function as guarantees of compensation if you can’t keep your promises.

What is a surety bond?

A surety bond is like a guarantee of financial protection that a contractor promises clients.

Let’s say, for example, that you cannot complete a job. Any number of reasons might lead to this failure on your part. However, by failing in your contract, you might have an obligation to compensate the client for their losses. You aren’t the only one who stands to lose out, after all. With a bond, you’ll essentially guarantee your customer you’ll repay them.

With a commercial bond, a party in need will file a claim with the bond company. The company will then process the claim, and issue payment. In this way, a bond will function a lot like an insurance claim. Your clients won’t have to suffer because of your mistakes, so to speak.

How a bond differs from standard insurance

Still, there are some important ways that bonds differ from insurance. While they will offer a settlement to affected parties, they don’t necessarily guarantee financial protection to the bond carrier.

If a bond company pays a claim on your behalf, you still have a financial obligation. You must repay the bond company for the cost of the claim. So, in that regard the bond is different from your standard insurance. Rather than getting off scot-free, you’ll still face a potential for financial loss because you must repay your client.

Who are the parties in the Bond?

Bonds involve three parties:

• The principal is you, the party who must carry a bond.
• An obligee is generally your client, or another party who requires a bond.
• The surety is the company issuing the bond.

Each party will interact differently in case of a claim. In some cases, the obligee files the bond claim, while in other cases it is the principal. In other situations, the surety company will pay the obligee directly, while others will pay the principal. The principal will then pay the obligee. Afterwards, the principal and surety will work together to settle the outstanding costs.

The benefits of carrying bonds

If you decide to carry a bond, you’ll create a better financial reputation for yourself and your company:

• You’ll be able to promise your clients more compensation in case you can’t follow through with a contract. That will likely make you more trustworthy.
• Many potential clients require businesses with whom they work to carry bonds. Therefore, to increase your ability to make contracts, consider bonded options your key.

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