Answer: From time to time a small business, especially those performing contracting services will be asked to bond his work in advance. In some states certain types of contractors are required to be bonded. What is a bond, how do you get one, and what does it do?
Simply put a bond (sometimes referred to as a surety bond) is a third party obligation promising to pay if a vendor does not fulfill its valid obligations under a contract. There are various types of bonds such as LICENSE, PERFORMANCE, BID, INDEMNITY & PAYMENT. A bond is a financial guarantee that you will honor a business contract. Frequently a customer will require that your company be bonded.
- PERFORMANCE bond is a guarantee that you will perform work in accordance with the terms of a contract.
- BID bond is a guarantee you will perform work if the bid is won by you.
- INDEMNITY bond promises to reimburse loss incurred if you fail to perform or if you fail to pay other vendors in the performance of the contact.
- LICENSE bond is required by some states for certain businesses. In some cases you pay the state directly rather than obtaining a bond.
- PAYMENT bond promises you will pay all subcontractors and material providers utilized in the performance of a contract. A bond is NOT an insurance policy. This is important to remember. A bond provides assurance that the contracted work will be satisfactorily completed only. For example your bond will not pay for property damage or personal injury resulting from your work. For this you need conventional insurance coverage.
Generally speaking, bonding companies will only provide bond coverage in an amount that you can cover with existing liquid assets. Before you purchase a bond from any bonding company, consider having the bond documentation reviewed by your attorney and ensure that you understand exactly what the bond can and cannot protect against (for both you and your customer).