The Ultimate Guide to Understanding Commercial Bonds

Many different types of businesses are required to obtain commercial bonds. In addition to providing additional business insurance coverage, these types of bonds can give clients confidence that your company is dependable and responsible.

Whether you are starting a new construction business or already established and growing, the right bonding partners can help you reach your growth goals.

What is a fidelity bond?

Fidelity bonds are insurance that protects businesses against losses from employee dishonest activities. These types of losses can include theft, forgery, and other acts that result in financial or property damage.

Any business that employs people who handle cash or valuable assets can purchase this type of bond. Companies that deal with customers, such as janitorial or cleaning services, may also want this type of coverage.

Financial institutions, such as banks or credit unions, might require a fidelity bond known as an ERISA Bond. This is required by law to protect pension plan beneficiaries. Unlike other insurance policies, these bonds don’t expire or get canceled when an employee’s duties change.

What is a bond?

Bonds are an essential part of a well-diversified investment portfolio. They are loans from investors to government entities and corporations repaid with interest.

Bond investors are repaid their principal loan amount at the end of the bond’s term (known as its maturity date). They also receive a stream of income from the cement through its periodic payments. This interest is referred to as the coupon.

Commercial bonds are typically required by businesses and working professionals as part of state licensing and permit regulations. They protect consumers from financial and physical harm caused by bonded companies that fail to follow applicable laws.

What is a surety bond?

A surety bond is a guarantee that contractual obligations will be fulfilled. It involves three parties: the principal (or contractor in most cases), the obligee, and the surety.

To secure a surety bond, the principal goes through an application process that often includes credit checks and, at times, financial statements. The surety then evaluates the principal’s ability to meet the bond’s terms.

Should the obligee claim the bond, the principal must reimburse the surety for any financial loss they suffered. This is similar to how insurance policies work. The principal should always ensure they are applying for the correct bond type that meets their obligations and requirements.

What is a license bond?

Some industries require licenses; part of the licensing process is obtaining a bond. The term “bonded” is often misunderstood, but a business must hold insurance and a bond to do its work, and the times are very different.

A license bond is a type of surety bond that guarantees that the principal will conduct their business by the laws and rules established by the governing body requiring the bond. If the principal violates these regulations, someone can file a claim against their bond to recover financial losses.

Three parties are involved in a surety bond agreement: the obligee, the principal, and the surety company that provides the bond.

What is a performance bond?

A performance bond is a contract surety that guarantees contractors will fulfill stipulations in a contractual agreement with clients. These stipulations can include a quality level or a project completion timeline. If the contracted company (the principal) doesn’t fulfill these obligations, the client can file a claim against the bond to be reimbursed for damages up to the bond’s total value.

This type of bond is typically required for construction projects but can also be necessary to secure service contracts like janitorial services. It is sometimes referred to as margin in the commodities markets.

What is a tax bond?

A sales tax bond is a type of surety bond that guarantees you will pay your state or local taxes. It also ensures that you will report your earnings correctly. Failure to do so can result in a bond claim against you.

Some states require janitorial bonds to guarantee that the janitorial services company will adequately clean up after customers and not steal items from their premises. If a bond claim is filed, the surety company pays it.

A commercial bond is a contractual agreement that establishes a three-party relationship between the obligee, the principal, and the surety company. The principal is the business that needs to obtain the bond.

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