What is a Corporate Surety Bond?
So, what is a 'corporate surety bond'? In short, it's another word for 'surety bond.' Some people just happen to add the extra word.
A corporate surety bond is a three-party agreement designed to guarantee performance and protect financial interests in business transactions. The surety promises to cover losses if the principal fails to meet contractual obligations, ensuring the obligee is safeguarded against default. This structure builds trust, facilitates compliance with legal or project requirements, and often serves as a prerequisite for securing work in industries like construction and professional services.
Corporate Surety Bond vs. Corporate Bond
While the names sound similar, a corporate bond and a corporate surety bond serve entirely different purposes. A corporate bond is a debt instrument issued by a company to raise capital for operations, expansion, or mergers. Investors purchase these bonds expecting interest payments and eventual repayment of principal. In contrast, a corporate surety bond is not an investment vehicle - it’s a risk management tool. It guarantees that a business or contractor will fulfill contractual obligations, protecting the obligee from financial loss if the principal defaults. Essentially, corporate bonds fund growth, while corporate surety bonds secure trust and compliance in contractual relationships.
How Does a Corporate Surety Bond Claim Work?
The main thing to understand about these bonds is that they protect the customer rather than the purchaser of the bond. For instance, in a contractor bond, a general contractor might purchase a bond, but they do not actually receive any form of protection from that bond. Instead, the customer or construction project manager/owner receives the protection, in case the contractor fails to live up to the terms of performance specified in the bond.
There is a third party in all contractual agreements as well, and that is the surety company. A surety company is, for the most part, an insurance company that also sells these bonds to clients. The involvement of the company doesn't end with the sale of a bond to the contractor, however, because the surety must also be prepared to pay any claims made against that bond, should the contractor fail to live up to his/her obligations.
This same model is typical of almost all surety agreements - there will always be a principal (the contractor), an obligee (the protected party) and a surety (the insurance company) involved in the three-way contractual agreement that constitutes a bond arrangement. It is definitely advantageous for a principal to purchase a bond even though they receive no actual protection from the bond. In some cases, it's actually required for a principal to have such a bond before being considered for hire. This is very common in the construction industry and it happens often that only those contractors who have purchased a bond are considered as potential candidates for receiving the work.
The bottom line on bonds is that they provide a guarantee of performance or the assurance that the principal will live up to the terms of an agreement between the principal and the obligee. Therefore, it protects the obligee against financial loss in the event the principal defaults on those terms. All three parties associated with the purchase of a bond will gain some kind of benefit: the principal receives hiring consideration, the obligee is protected against financial loss and the surety generates revenue from the sale of the bond.
How to Obtain a Corporate Surety Bond
The first step in obtaining a bond is making sure you have financial statements prepared for a surety company to review. This will be necessary to determine your creditworthiness and to establish that your company is responsible and reliable. It will help if you've been in business for several years, and if you have a good credit score, confirming your financial stability.
Next, you'll need to find a surety company that will issue a corporate surety bond to your company. While there are many such companies, you'll have to find one authorized to sell the type of bond you need in the state where you're doing business. You may want to check on the surety company's business rating, it's pricing for bonds and the turnaround time it requires for bond issuance.
Having found the right surety, you can then apply for a bond by filling out the required form and submitting it to the bonding company. If it approves your application, you will receive a copy of an indemnity agreement that specifies exactly what the bonding company will be responsible for if a claim is made against the bond. You'll have to sign this indemnity agreement and return it to the company before a bond can be issued.
After signing the indemnity agreement, you'll have to pay for the bond via an arrangement you make with the surety company. When the bond is actually issued, you will have to sign it because it is a legally binding contract between you, the surety company and a third party referred to as the obligee, who is the customer that will be using your professional services. Most bonds are renewable annually, which means that to maintain the coverage provided by the bond, you need to pay an annual premium to the company to keep it in effect.
You can start the bonding process by reaching out to us. Either fill out the online application below or call us at 866-540-4002. We'll ask you a few questions and get the ball rolling right away. Some bonds can be finalized in-house to save you time and money.
