Uncovering the benefits of surety bonds (2024)

Surety bonds are essential for many businesses. They provide financial protection and ensure contractual obligations are met on various projects. Surety bonds create a three-way relationship between the principal, the obligee, and the surety.

The members of this three-way relationship can be defined as follows.

Principal – The party that purchases the bond and is obligated to fulfill specific contractual or legal obligations. Some examples of principals include construction contractors, service providers, executors, administrators, banks, and credit unions.

Obligee – This party requires the bond and benefits from the financial guarantee provided by the surety. Some examples of obligees include project owners; federal, state, and local government agencies; mortgage lenders; licensing authorities; and litigants.

Surety – The insurance company that underwrites and provides the bond. They can also provide their expertise to help get a project back on track.

Depending on the project, many types of surety bonds can be issued. In this blog, I'll discuss some of the benefits of surety bonds and their significance in today's business landscape.

Benefits of surety bonds

1. Financial security and risk mitigation.

All projects regardless of size or complexity include some element of risk. Surety bonds provide financial security by ensuring the principal will complete contractual obligations. If the principal fails to meet these obligations, the surety will pay the financial losses incurred by the obligee.

2. Improved credibility.

Obtaining a surety bond can positively affect a business's credibility. It indicates to clients and partners that the business is financially secure and has the ability to complete its contractual commitments. This credibility can make a business more appealing in a competitive environment.

3. Legal compliance.

Businesses in certain industries may be required to obtain surety bonds to ensure compliance with legal and ethical standards.

4. Growth.

Surety bonds are instrumental in promoting growth for businesses. They can provide businesses with the financial backing to pursue and secure new contracts contributing to their growth, reputation, and expansion.

5. Dispute resolution.

If there’s a disagreement between the principal and the obligee, surety bonds offer a framework for resolving the issue. The surety can intervene to help find a solution and settle the dispute, ensuring the project can move forward without any delays. Project continuation provides benefits to others involved in the project such as workers and suppliers.

6. Alternative to letter of credit.

A letter of credit guaranteeing that a payment will be made is drafted by a bank or financial institution. However, these letters can be time-consuming to create, contain fees, and don’t cover all transactions. A surety bond is a cost-effective alternative. It offers financial security while allowing businesses to allocate their resources more efficiently. Because the cost of obtaining a surety bond is usually lower than tying up large sums of money to get a letter of credit, it’s often the preferred option.

7. Protection for American taxpayers.

Every surety bond ultimately benefits American taxpayers. This is because public infrastructure projects, such as highways, bridges, tunnels, buildings, and parks, are funded by tax revenue. Without a surety bond, a project's failure could put more financial pressure on taxpayers.