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What is the Commercial Bond?
A commercial bond provides a financial guarantee for government agencies and customers. Many businesses and/or individuals are required to purchase a bond to obtain a business license or permit, the court may order for a personal representative to execute an estate per the decedent’s wishes, and contractors may be required to get a bond before signing a contract for a construction project.
Who are the three parties in the Commercial Bonds?
The three parties in the Commercial Bond consist of the Principal, the Obligee, and the Surety.
The principal is the party required to purchase a bond. A surety bond is underwritten much like a loan, and the principal must qualify for the bond. Bonds are generally written for a 12-month term and need to be renewed annually.
- The obligee is the party that requires a bond to be purchased by the principal.
- A commercial surety bond provides the obligee financial protection in a commercial contract.
- The oblige might be a government agency, local municipalities, individuals, or companies.
The Surety refers to the company that issues the bond. The Surety Bond provides protection to the Obligee. If “The Surety” needs to pay a claim, it will seek reimbursement from the Principal.
What are the advantages of Surety Bond?
Benefits of a Surety Bond include:
- Contractor accountability
- Assures project completion
- Offers financial security
- Technical, managerial, or financial assistance
- Reduce the risk of liens filed by subcontractors, laborers, and suppliers
- Protect taxpayer dollars
- Smoother transition from construction to permanent financing
- Lower costs
Essentially, a surety bond allows contractors to offer their clients peace of mind and a level of accountability provided by the Surety. This implies that The Surety agrees to uphold the contract for the benefit of the Obligee. If the Principal breaks their agreement with the Obligee, the Surety takes over to ensure contractual obligations are met. The Surety will pursue the Principal for the full balance paid to the Obligee.
What are the two types of Surety Bonds?
1. Contract Surety Bond
A contract surety bond ensures that a contractor completes the work as agreed upon. The project owner is the Obligee of the surety bond, which guarantees that the principal contractor can complete the work agreed upon and pay for the required subcontractors, equipment, and supplies.
2. Commercial Surety Bond
A commercial surety bond is a requirement of government entities to protect the public’s interests. Federal, State, or local government may require business owners to purchase a commercial surety bond to operate their business. Types of Commercial Surety Bonds include license and permit bonds, lottery bonds, mortgage broker bonds, court bonds, public official bonds, notary bonds, liquor bonds, and title bonds.
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