If you are an entrepreneur or the owner of a new business, you have certainly come across the term “surety bond” before. In the United States, surety bonds are an important factor when it comes to the operations and success of any business, no matter its size and scope.
This goes double for certain industries, where surety bonds are not simply nice to have, but a requirement set by the government.
However, many business owners struggle to fully grasp the concept of surety bonds and the implications they have for their companies. Given the fact that there are many types of surety bonds, it is understandable that there is some confusion on the topic.
On top of that, surety bonds can be vastly different between states, which only makes matters worse.
In this article, we will provide you with a detailed explanation of what surety bonds are and how they work. We will also delve into the specific types of surety bonds on the market and how they differ on a state-by-state basis.
By the end, you should know everything you need regarding surety bonds and how you can use them for your business.
What Are Surety Bonds?
Surety bonds are legally binding agreements that are designed to provide a financial guarantee to a business’ customers, suppliers, subcontractors, and government bodies. Essentially, they ensure that your business will complete a project as per the contractual obligations on one side, and the state regulation and industry practices on the other.
Commonly mistaken with insurance, surety bonds only cover contractual agreements — not third-party claims of damages.
A surety bond is a three-way contract where the company that gets bonded is referred to as the principal. The side that requires the bond to protect themselves financially is the obligee (customers, project owners, state regulators, etc.).
The bond itself is prepared by a third-party company known as a surety. It agrees to pay the obligee in case the principal fails to deliver as per contract or does not adhere to industry regulations.
Keep in mind that unlike with insurance, the principal of a surety bond has to fully reimburse the surety in case a bond claim is paid on their behalf.
Surety bonds can be beneficial to any business since they provide much-needed financial protection for customers and a level of credibility for the business. Also, surety bonds are rarely ever used. However, it is better to have one in case the need arises.
As we already mentioned, surety bonds are required for many industries, with the largest one being construction.
Do Surety Bonds Differ by State?
Since surety bonds are mandated by state and local governments, it makes sense that they would be different. In fact, surety bonds across states can differ significantly and in more ways than one.
First of all, depending on the state your company operates in, you might have a variety of different surety bonds available. The requirements under which they are issued can also vary by state, with some states being more demanding.
Finally, the prices you will have to pay are also different in each state. For example, Michigan surety bonds do not cost the same as ones issued in Illinois.
Let’s take a look at how exactly surety bonds differ across states. For more detailed information, make sure you check with your local government about surety bond requirements for your state.
Types of Surety Bonds Across States
There is a great variety of surety bonds on the market. Technically, you can acquire bonds that protect your customers during every stage of a project. From bidding and execution to post-completion maintenance — there are specific bonds designed for each step.
However, state governments have their own regulations when it comes to bonds. As a result, each state has its own set of bonds for each particular industry.
Generally, there are three types of surety bonds that are most common for all industries. Each state has its rules, but most surety bonds are variations of the following main types:
License and Permit Bonds
These types of bonds are required for auto dealers, licensed contractors, and freight brokers, and other types of businesses in order to operate legally.
Contractor Bonds
Businesses working on public construction projects are required to obtain a contractor bond.
Court Bonds
Individuals and businesses obtain these bonds when they are engaged in proceedings involving a court of law.
Bond Requirements in the Different States
Depending on the state your business operates in, you might have to obtain certain surety bonds. Owning a bond is a requirement for many business types across the USA, but that varies from state to state.
Generally, you will need to get bonded in order to even begin doing business in certain states. In most states, surety bonds are a requirement for all public bids and tenders. Keep in mind that some private projects might require you to get bonded despite the local standards in your state.
Surety Bond Costs Between States
Since local governments set their own regulations for specific bond types, the prices of surety bonds vary significantly between states. The amount of the bond directly affects the premium you will have to pay.
After all, surety companies charge you a percentage of the sum of money you are bonded for. For example, a construction company might need a $5000 surety bond in one state and a $10000 surety bond in another state.
Conclusion
As a result, the premiums in the second state will be considerably higher. The price of a surety bond can also vary based on its type and industry.
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