Surety bonds are typically issued by insurance companies and may be required for certain businesses. While there are many different types, they all function in a similar way.

How Do Surety Bonds Work?

The purpose of these bonds is to guarantee that your business will fulfill its contractual and legal obligations. If you fail to do so and a customer makes a claim against your company to recover the resulting losses, the issuer of the bond steps in to remind you of your obligation to pay the claim, once it is determined to be valid.

If you don’t pay the claim, the issuer of the surety bond may settle it for you. Nonetheless, your company will be responsible for reimbursing the issuer for all the costs associated with the claim. This is the primary difference between a surety bond vs. insurance policy.  Under an insurance policy, you aren’t obligated to repay insurance companies for a claim that they have agreed to settle.

What Businesses Use Surety Bonds?

If you are an auto dealer, mortgage lender or collection agency, it’s likely that you will need to acquire a surety bond to obtain a business license in your state. However, these aren’t the only companies that may require surety bonds.  For example, your construction business may require a bond if it’s bidding on a municipal building project.

Even if your company isn’t legally required to have a bond, it can still provide peace of mind to both you and your customers. Consult an expert to find out how a surety bond can benefit your business.