Surety Bond FAQs
From a performance bond to a bid bond, not having the right surety bond can be risky business. Here are three frequently asked questions and answers when it comes to surety bonds.
How will I know I need to obtain a surety bond?
A bond is a guarantee provided by a third party. You’ll essentially be told that you need to provide a bond. A typical situation where bonds are required include signed contracts that require performance or payment guarantees. Perhaps you’re trying to obtain a license with a state or municipal government to comply with local laws or perhaps you’re in a judicial proceeding where the bond needs to be filed with the court.
There are literally thousands of situations where you could be required to post a bond. But the requirement will always come from a third party.
What industries are more likely to require surety bonding?
While all businesses regardless of what they do can be required to provide bonding from time to time, certain industries are traditional surety users. Certainly, the largest is construction. Construction and related industries make up roughly 60% of surety revenue as a rule.
In addition to construction, we see surety bonds as an important component in a risk management profile in other industries such as: waste, mining, homebuilding, oil and gas and manufacturing. But keep in mind that any business regardless of what industry will be required to post a bond from time to time.
What will I need to provide in order to obtain a surety bond?
Surety is not insurance but rather a form of credit. Because of this, underwriting and information requirements will include financial data both corporate and personal. What you need to provide will depend on the type and size of bond obligations you’re required to post. Bonds that require a financial guarantee as part of the obligation will require the most extensive underwriting. A balance sheet and P&L on the corporate entity will be required to assess the financial position and operational performance of the firm.
If the corporate entity is privately held there’s a high degree of likelihood that personal financial information and individual guarantees will be required. It’s much like qualifying for a bank loan for a closely held company. However, in other instances where bonds are required to support licensing, they typically don’t contain financial guarantees. In those instances, the underwriting is less stringent and financial information may not be required at all.
Still have surety bond questions? Contact a member of the ‘A’ Team.
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