Surety Bonds

Surety bond definition

Surety bonds are financial arrangements that usually involve a borrower, a lender, and a third-party guarantor, although in some cases there is no exchange of money involved. The definition of a surety bond is rather general, since surety bonds encompass a large number of contractual transactions. The most commonly used definition of a surety bond, and one that distinguishes it from other types of loans, is that while most contracts and lending arrangements are conducted between two parties, surety bonds always involve at least three parties who have a financial stake in the outcome of the contractual obligation.

Surety bond costs

Because surety bonds require the services of a third-party underwriter, they typically entail greater costs than most other lending arrangements. The underwriting party to the loan usually is given a fee upfront for facilitating the loan and, in the event the borrower defaults, the underwriter must pay the lender the agreed-upon amount. At that time, the underwriter may choose to pursue legal remedies against the borrower in order to recoup the losses experienced. Because the guarantor is a legal party to the loan, the individual or company has the same rights as the lender to pursue all legal means to collect the debt.

Contract surety bonds

Contract bonds are one of the most popular types of surety bonds, and are used in construction projects or other building and maintenance jobs. In order to ensure that all specifications in the construction contract are honored and that the contractor fulfills the promised work on time, a surety bond may be required and offers additional protection for the company or individual hiring the work done.

Bail bonds

Another well-known type of surety bond is the bail bond; this surety bond serves as a guarantee that the individual will appear in court on a future date, and is one of the highest-risk surety bonds. As a result, the surety bond costs for bail bonds are much higher than for most other types of surety bond agreements; the risk to the guarantor typically justifies this much higher cost.

License bonds

License surety bonds are often required for opening a new business and are contracts between the company, the licensing agency, and the guarantor. In the event that the company deviates from the terms of its license, the agency that licensed the business can revoke the license and collect from the guarantor any damages due.
Tim Ord
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