There is something to be said for peace of mind, especially when dealing businesses in today’s market. With the large number of start-up businesses flooding nearly every market, a number of malicious companies lie in wait for unsuspecting victims. To make matters worse, some of these menaces can be so devastating that they utterly destroy the companies who hire them. This is the point where contracts become necessary, but without a full time legal staff on hand and no budget to hire one, how can one determine the wording or requirements of surety bonds, and keep themselves protected in the event of legal action?
The use of a surety bond may help to protect an individual, but what is a surety bond and why is it necessary? A surety bond generically describes many types of bonds, but in its simplest form, it is a contract between three companies. It effectively states that if the company providing a service fails to meet its obligations to the purchasing company, then the purchasing company may request that surety company (similar to an insurance company) step in to review the problem. If the surety company finds that the purchasing company has been wronged, then they provide compensation to the purchasing company from a bond that has been setup by the business providing the service.
To make matters more confusing, there are subsets of surety bonds, such as the performance surety bonds. What is a performance bond, and how does it differ from a surety bond? This convoluted terminology is little more than the term used when an insurance company is company to issue the surety bond on behalf of the company providing the service. There are specific requirements for such a deal to take place, but it provides a solution for those companies who are just starting up and do not have the expendable capital for purchasing their own surety bonds.
It should be noted that performance surety bonds are not insurance, even when issued by an insurance company. They are in fact bonds that will cover a certain amount of damages or revenue in the event of a contractual breach, and many still require that the penalized company provide compensation in full if it passes the amount set in the bond.
The use of surety bonds in today’s market is essential, especially with the rise of individual contractors and small businesses that focus on fundamental markets. A number of key business markets can utilize performance surety bonds, such as auto dealers and businesses that require licensing with state and federal governments. With the development of surety companies, it is possible to receive a detailed legally binding contract, a surety bond, and all the information necessary without the need for an expensive legal retainer as most surety companies work on a per job basis unless there is call for an ongoing relationship.
