how does a surety bond work

Short on time? Read our Surety Bond FAQ.

What is a Surety Bond?

Surety bonds are similar to insurance policies, but there are a few key differences. For example, while an insurance policy is a two-party agreement (between the insured and the insurer), a surety bond is a three-party agreement.

You can learn more about how surety bond and insurance are different.

With contractors, a surety bond is an agreement between the contractor, the contractor’s client, and a third party surety bond company. The surety bond company covers the contractor’s promise to complete the terms of a contractual agreement between the contractor and client. 

How Does a Surety Bond Work?

Let’s use the example of a contractor: A contractor would get a bond to promise that he/should would fulfill his/her obligations.

This is just a brief summary; you can learn more about how the bond claim process works.

If you have ever been told you should always choose a bonded contractor for construction or handyman work, “bonded” refers to the contractor having a surety bond.


When You Need a Surety Bond

Contractor agreements are one of the most common situations where surety bonds are used. In many cities, someone starting a new business may be required to obtain a surety bond that guarantees the business owner will abide by all local business regulations. 

Another common situation requiring a surety bond is when someone purchases a vehicle and the vehicle title has been lost. Sometimes, getting a replacement title is not possible, and in these cases, the vehicle buyer must purchase a lost title bond as proof of ownership in order to register and insure the vehicle.

Check out this post on 5 Types of Surety Bonds Small Businesses Need

How to get a Surety Bond

If you need to obtain a lost title bond for a vehicle, your state’s Department of Motor Vehicles will have a procedure that you follow and forms you fill out before obtaining a bond. Once you have the required paperwork, you purchase a lost title bond from a surety bond company.

Likewise, contractors and local business owners generally complete necessary paperwork before they contact a surety bond company. Surety bonds can be purchased online now, and many people prefer this method, because it allows them to compare prices before making the purchase.

There are many types of surety bonds, too many to name. Here are resources pages for some popular surety bonds:

What if You Have Trouble Qualifying For a Bond?

what is a surety bond

When you apply for a surety bond from a surety bond provider, the providerconsiders several factors, including your working capital and cash flow, past performance history, your business equity and debt, your credit score, and your capacity to complete the contract.

New or small companies may lack the financial strength or contracting history to qualify for a surety bond directly from a surety company.

In these cases, companies may be able to obtain backing from the US Small Business Administration, which can back these companies due to a federal partnership with the surety industry. By guaranteeing a bond and helping mitigate the risk of default, SBA backing can help companies that may have trouble qualifying for a necessary surety bond.

Do You Need a Surety Bond?

Surety bonds are critical to many business transactions, and should you need a surety bond, you want to get the best rate.

At Surety Solutions, LLC, we offer you the convenience of getting bids online as well as instant underwriting technology, so you don’t have to wait to obtain the bond you need. Let Surety Solutions, LLC help you through the surety bond process, and you can be confident you will receive the bond you need at the best possible rate. Get Free, no obligation quotes now!

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Related Links:

Surety Bond Frequently Asked Questions

Types of Surety Bonds [Infographic]

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