A bond typically represents the debt of issuers. It’s a three-party contract, with each party having a distinct role to ensure that the agreement is honored. With surety bonds, they’re issued simply because it’s required by the party expecting the service. They want protection in the event a contractor is unable to deliver on their contract.
Surety bonds can also provide assurance that deadlines will be met. If bonds are something you’re interested in, read on because this article looks at the bonds available and what can be gained from investing in them.
Surety Bonds
These bonds are similar to the bonds described in this article’s introduction, in the sense that it represents the potential debt of the issuer, known as the principal. If they fail to deliver on their promise to perform their service, the surety has to pay the obligee.
Although we’re about to briefly discuss the three parties involved, you can get more information about them if you click here. Each of the three parties has an integral role in how surety bonds work. So if you’re thinking about investing in a bond, it’s a good idea that you have a good understanding of each role.
The Principal
This is the person or entity that has agreed to perform a service, and so they’ll purchase and file the surety bond. They’re ultimately responsible for their actions, so if they fail to deliver on their agreement to provide a service, they’ll be liable to pay the surety company for any payments under the bond.
The Surety
This party provides a financial guarantee that the principal will deliver on their promise to deliver their service, as per their obligation as stipulated in the bond.
Obligee
Either a Government Agency or other entity, this party is expecting the principal to deliver on their service, otherwise, they expect the bond to be honored. If the principal becomes liable to pay the surety company, the obligee will have to file a claim with the surety for financial reimbursement. Once this is done, the surety has to pay the obligee the amount stipulated in the bond.
Types of Surety Bonds
Contract Surety Bond
This type of bond provides security to the obligee by protecting them if the principal fails to deliver on the promise of providing a service. Therefore, if a contractor doesn’t complete the work stated in the contract on time, and to an expected standard, the project owner will be covered by this bond. This gives the project owner assurance that when entering into this type of bond, the contractor will deliver as per the conditions stated in the contract.
Bid Bond
This bond is a guarantee that the Surety, which is the bonding company, will provide a performance and payment on the Principal’s behalf when the Principal is awarded a contract.
Performance Bond
A performance bond is the surety bond that’s used when the contract is awarded. It protects the owner from financial loss in the event that the contractor fails to deliver as per the terms of the contract they entered into.
Performance bonds are often given to contractors, who have to bid for the contract. Upon being given the contract, they automatically enter into performance and payment bonds to guarantee they’ll complete the project.
Payment Bond
These are also known as material and labor bonds, and often work hand in hand with performance bonds. Whereas a performance bond guarantees the job will be done, a payment bond guarantees subcontractors and other third parties will receive payment upon delivery of their service.
It protects certain subcontractors, and other parties, like material suppliers and laborers in the event that the contractor doesn’t pay them, as agreed in their contract. Those covered by the payment bond usually look to get paid by the surety, as per the terms of the payment bond.
Fidelity Bond
This type of bond is offered by financial institutions to individuals and businesses. One party is the guarantor, and they agree to take on the debt of the other party if they fail to default on their agreement. Whilst this protects the obligee from losses, it doesn’t provide either party with funds until something goes wrong. With a fidelity surety bond, however, the party providing the service and their employees are vetted so that clients know whoever has access to your money can be trusted with it.
This article has explained some bonds available and by doing so has given you a starting point for you to look further into. Whilst it’s good to get advice from friends and loved ones, always make sure you speak to a financial expert who can provide you with impartial advice about bonds. This is so you can make an informed decision when seeking to expand your investment portfolio in a way that works for you.
