The Basics of Surety Bonds for Small Businesses

Financial constraints are a significant challenge for small businesses in the U.S. and beyond. Those operating in the construction industry have it even rougher. This is mainly because most construction projects exceed the budget by 16 percent or more, per statistics. Therefore, small construction firms have lower chances of completing these projects due to inadequate funds. For this reason, the federal or state government requires such businesses to have surety bonds before taking on any government projects. Entities that subcontract their jobs also need subcontractors to have surety bonds. Here’s detailed information on this topic.

What are Surety Bonds?

These are a type of commercial insurance coverage suitable for businesses operating in the construction and finance industries. It is essential for businesses that work on government projects. If your company cannot fulfill the terms of a contract for a specific reason, the insurance company, or surety, will repay the government the amount invested. This helps to prevent financial losses as well as guarantee the completion of projects. Unlike other insurance coverages that protect business finances, surety bonds protect third parties’ funds.

The Parties Involved

Surety bonds involve three parties as follows:

  • Surety: This insurance carrier provides coverage in the form of surety bonds.
  • Principal: This is the small business seeking insurance coverage in the form of surety bonds.
  • Obligee: This is the entity that mandates a business to get surety bonds. In most cases, the obligee is the government.

Who Needs Surety Bonds

The Small Business Administration (SBA) typically helps small businesses get surety bonds. As mentioned earlier, surety bonds are for small businesses that frequently do business with the government. If, for instance, your firm wins a bid to construct a public road, the government will require you to have surety bonds before commencing the work. It is essential because if you cannot build the road to completion, the government will receive a refund of its investment. Surety bonds are also necessary for small construction businesses that regularly get sub-contracted projects. Those working with financial institutions such as banks may also need surety bonds.

What is the Cost of Surety Bonds?

Like any other insurance coverage, the cost of surety bonds depends on the following factors:

  • Amount of Coverage

Business owners can choose their preferred size of coverage. This largely depends on the size and cost of the project involved. A small surety bond will not help because if you cannot fulfill the terms of the project, the surety will not be able to compensate the obligee fully.

  • Type of Surety Bond

There are three main types of surety bonds – contract, fidelity, and business service. The type you choose depends on the nature of your business. For instance, a contract bond is suitable for any business undertaking government contracts. On the other hand, fidelity bonds protect clients’ funds from fraudulent employee acts.

  • Credit Score

A low credit score will likely cause the price of surety bonds to hike.

How Can Advanced Insurance Group Help?

Contact our professional agents at Advanced Insurance Group today. We can analyze your needs and evaluate your current policy. We have the knowledge and experience you can count on to ensure you always have suitable types of coverage. Before you take your first construction job, ensure you have insurance that will protect you from any risk.

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