What are commercial bonds?
Being bonded is different from being insured, as commercial bonds are not technically insurance. Instead, think of bonds as an extra layer of protection for the parties involved.
How do commercial bonds work?
For example, with surety bonds, the obligee (the party requiring the bond) is protected if the principal (the party needing the bond) fails to fulfill a portion or the entirety of a contract. While your business may have insurance, you may also need to purchase a bond depending on the type of work you’re doing. We’ll explore a few specific types of bonds below. Also, different jurisdictions may have their own requirements for bonding. Here are some examples of the different types of commercial bonds:
- Bid Bonds
- Contract Bonds
- Fiduciary Bonds
- License Bonds
- Lost Instrument Bonds
- Maintenance Bonds
- Miscellaneous Bonds
- Non-Contract Bonds
- Payment Bonds
- Performance Bonds
- Probate Bonds
- Public Official Bonds
- Subdivision Bonds
- Surety Bonds
License bonds are required of many businesses.
Many local, state, and federal government agencies require businesses to obtain license bonds—also known as permit bonds—before they can receive a license or permit for their industry. For example, if you run an auto dealership, you may be required to purchase an auto dealer bond before you can begin selling or trading vehicles. License bonds help protect consumers from fraud or other types of harm caused by the business being bonded. It is essentially a way of guaranteeing that a business will adhere to any governmental regulations required of its industry.
Bid bonds for contractors and construction.
Bid bonds are usually used solely by contractors and construction businesses. Project developers often require contractors bidding on a project to purchase a bid bond in order to protect their interests. Before bid bonds were often required, some contractors would bid low to gain the contract and then raise the price once work had started or dropped out of the project altogether, resulting in problems for the project developer. Now, with bid bonds, project developers can feel better about the contractors they choose, as bid bonds guarantee that contractors are financially sound enough to complete projects and that the bids they place are serious and competitive.
Performance bonds are the follow-up to bid bonds.
As a contractor or construction company, you’ve gotten your bid bond, you’ve placed your bid, and now you’ve been awarded the project. That means more business for you, but that also means you’ll need to look into a performance bond. Developers often require performance bonds as a way to protect the investment they’ve made in the project. This type of bond guarantees that you as the contractor will complete the project as agreed in the contract. Rates for performance bonds depend on a number of factors, including the bid amount and past jobs that you’ve done.
Lost instrument bonds help everyone get the money they need.
You’ve just gotten a cashier’s check, a money order, or even a stock certificate, and now you can’t seem to find it. Often, financial institutions will require you to get a lost instrument bond before issuing a replacement. These bonds guarantee that if the original lost instrument—cashier’s check, money order, or stock certificate, for example—is ever found, you as the bonded party won’t be able to cash it in addition to the duplicate. This protects financial institutions from making two payments and thus losing money. There are two types of lost instrument bonds—fixed penalty and open penalty. Fixed penalty bonds are issued for instruments of fixed value, such as checks. Conversely, open penalty bonds are issued for instruments with values that fluctuate, like stock certificates. A variety of financial instruments may be covered under a lost instrument bond.
Bonds upon bonds upon bonds.
These are only a few of the more common commercial bonds that you may come across in your business ventures. There are many other types of bonds, from a variety of other construction-related bonds to court-related and commercial-related bonds. Figuring out which bond or if you even need one can be tricky. We may be able to help you find the bonds that are required federally and locally, right down to the city where you work.
If you’re looking to learn more about commercial bonds and their requirements, contact us.
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