3 reasons why you may need surety bonds for your business

by Jerry S. Jerry Stark is a professional writer and publisher

Surety bonds are booming as an alternative to standard letters of credit, being used to fulfill various obligations. There are significant differences between the two financial instruments. While surety bonds guarantee that the work will be undertaken, letters of credit promises that payments will be made. Sureties are better because they offer additional financial protection. Of course, there are many other arguments backing the supremacy of surety bonds, yet this is all you need to know for the time being.

The commercial surety market of the United States is expanding at an alarming rate and this is due to the fact surety bonds are incredibly attractive. They increase the credibility of the business that uses them, make it possible to use the entire operating line of credit granted by the financial institution, and ensure the privacy of your activities. It’s evident that sureties offer a great deal of support for businesses. Just about anyone can benefit from using them. What do you say? Don’t you need to provide a guarantee that you’ll comply with your obligations? Chances are that your business needs some kind of financial guarantee. Here are the top 3 reasons why you may need to get surety bonds.

1. Winning work in the construction industry

Contractors are responsible for providing the labor, material, and equipment that are necessary for the construction project. They win contracts through bids and bid proposals. If you’re working in the construction industry, then you already know how hard it can be to acquire new business. Competition is fierce. Every company says that it is the best. We’ll let you in on a little secret. There is a way in which you can increase your chances of winning the bid. All you have to do is post a bid bond. This type of surety bond is meant to protect the project owner – you, in other words – serving as legal and financial protection. The surety provides enough assurance that the project will be completed if you’re awarded the bid. It also promises that you’ll undertake the work at a specific price.

A bid bond isn’t the same thing as a performance bond. The distinction lies essentially in what the two instruments support. The former prevents you from submitting a low bid and changing the terms of the contract as you please, while the latter guarantees on-time completion of the project and respecting the budget. It’s important to understand that with high projects, the risks are very high. More than half of the enterprises that activate today will be out of business in a few years. This is the reason why major companies and government agencies require surety bonds or bonding if you prefer. Contract bonds aren’t so easy to secure, as you have to supply strong business financials. However, you’ll manage to come up with a solution.

2. Reducing financial risk

It takes CEOs and business owners risks to learn how to reduce their financial risk. Until that happens, they make mistake after mistake. Unfortunately, construction and financial risks go hand in hand. Anything can go wrong and even the tiniest mistake will cost you greatly. If you fail to achieve what you were trying to do, nobody will feel sorry for you. On the contrary, you’ll have to pay the customer out of your own pockets. How can you possibly reduce financial risk on construction projects? With the help of sureties, of course. You see, surety bonds ensure that the principal and the interest will be paid in compliance with the agreement. If you’ve been paying attention until now, then you know that these instruments offer higher financial protection as compared to traditional letters of credit. Get in touch with a surety company that understands your industry.

3. Gaining industry recognition

The quality of your work should speak for itself and be recognized by the entire industry. What if that doesn’t happen? If not, you’ll have to do your best to gain recognition and, ultimately, grow your business. Using surety bonds is a strategy that many people are using to stand out. While you won’t win any industry-specific rewards, you’ll certainly inspire confidence. When you have sureties in place, you’re letting industry peers and collaborators know that you’re reliable. Nothing will improve your reputation in the construction industry like providing a financial guarantee. The surety company is the one that offers financial guarantee of the bonds issued. Attention needs to be paid to the fact that this doesn’t cover the entire liability.

The vast majority last for a specific period of time, meaning that it’s necessary to renew or extend the bond. You need to check whether or not it’s possible to renew the existing contract. Certain aspects, such as the type of instrument and if the oblige necessitates renewal, interfere in this situation. The renewal process implies examining the risks and calculating the bond premium. The cost depends on the amount of coverage that is essential and it can range between 1-15%. Experts work with several markets. In addition to selecting an appropriate service supplier that caters to the needs of the construction industry, you have to find the most competitive rates.

Obtaining surety bonds explained

Surety companies are the ones that issue the sureties. Banks aren’t the only ones who can do that. As a rule, they are subsidiaries or divisions of insurance companies, which is the reason why their activity is controlled by state insurance departments. If you have found a professional agent or broker, then you must proceed to submit the application. Provide a little bit of information about yourself and your business. once the necessary data is collected, it will be passed on to the company underwriter who will determine if you’re able to do the job. Everything from your credit history to your experience will be taken into account. You can accept the surety bond quote or not. If you do, then make a commitment by paying and signing the agreement. The surety company will stand behind the commitment undertaken. As for you, you have to meet all your obligations.