A surety bond is a contract drawn by three parties who agree to abide by its terms. The three parties are a surety company, a principal and an obligee. “Obligee” is a legal term for a party who requests that another party, the principal, provide a bond. The principal arranges with a surety company to have the bond processed and issued to them. A surety bond guarantees the performance of a contract, such as a construction project. If you are a contractor, you can get a surety bond from a credible Minnesota surety bond company.
How Do Surety Bonds Work?
The bond process starts when a principal wishes to fulfill the bidding requirements of an obligee. The principal contacts a reliable Minnesota surety bond company and makes an application for surety bond. The surety bond company appraises the applicant on the basis of certain key parameters.
- Credit score
- Financial position of the applicant and/or their business
- Liquidity of the applicant — how quickly the applicant could repay a claim
- Business experience of the applicant
- Any other aspect the surety company might deem important
Once the surety company satisfies itself that you have met their requirements, they process the bond and issues it. You can get a Minnesota surety bond in a day.
If you bid for and win a contract with your county council to construct a building, you should perform the project in accordance with their exact specifications and adhere to the stated timelines.
Non-Performance of Contract
If the principal fails to perform the work in accordance with the specifications of the contract, the obligee can sue the surety, the principal or both for recovery of losses suffered. Where the claim is valid, the surety pays the obligee. Contract law requires the principal to pay back such claims as the surety company pays out. The surety ensures that the applicant signs a document called Indemnity agreement at the point of application. This gives them power to attach personal or corporate assets of the principal.
What Do Surety Bonds Cost in Minnesota?
Surety companies typically calculate a bond premium on the basis of the applicant’s credit score. If your score is good, you can negotiate for a lower premium. Minnesota surety bonds cost between 1% – 3% of the bond amount.
Types of Surety Bonds
Surety bonds of the same kind are similar in every state. However, similar surety bonds may differ in terms of requirements and pricing. In relation to construction bonds, for instance, different states may establish their own versions of the Miller Act of 1935. For a clearer understanding of bonds, we will organize them into three main categories:
- Commercial bonds
- Contract bonds
- Court bonds
Court bonds include appeal bonds, fiduciary bonds (also called probate/executor bonds) and custodian/guardianship bonds. These bonds protect individuals, businesses and communities in the face of civil or criminal litigation. A fiduciary bond, for example, protects heirs from potential malfeasance by the executor.
Contract bonds ensure that people complete contracts in accordance to the legal terms. They are quite common in the building and construction industry. The Miller Act directs that individuals and entities bidding for construction projects (over more than $100,000) funded by the public should provide surety bonds. Bid bonds, performance bonds and payment bonds are the three most commonly used bonds in the construction industry.
Commercial bonds help the authorities regulate businesses. They ensure that professionals adhere to industry standards and ethics. They protect the public from unethical business practices. Most commercial bonds are license and permit bonds. To start an auto dealership, the law requires you to provide a license and permit bond called an auto dealer bond. Other types of license and permit bonds are:
- Sales tax
- Mortgage broker
- Contractor license
Other examples of commercial bonds are fidelity bonds and utility bonds. The government doesn’t require them.
- Fidelity bonds: They work the same as insurance. The Small Business Association likens them to insurance. If you run a janitorial service, for instance, and one of your cleaners steals from a client, a surety company writes you a check so that you can replace whatever your customer lost. Customers prefer service providers who have adequate bonding. It gives you credibility.
- Utility companies usually require users to provide utility bonds. Their purpose is to encourage customers to make timely bill payments.
Industries that require surety bonds in Minnesota:
- Construction – you can’t successfully bid for a publicly funded project without submitting information about your surety bond. Federal law requires that any project above $100,000 be secured by a bond. This protects the public from losses.
- Medical industry – if you sell medical supplies, you need to file a $50,000 bond before you can bill Medicare.
- Mortgage industry –before you can get a license to operate a mortgage brokerage firm, you must file a bond with your state. Your state determines the bond amount, and this may differ from state to state.
- Automotive industry – you should organize to get a surety from your state before you approach them for licensing. The purpose of this bond is to ensure adherence to industry standards and business ethics by industry professionals.
How Do I Get bonded?
This is simple. Talk to a reputable Minnesota surety bonding company. Our team will teach you how to get bonded in Minnesota. Describe your needs to us and you can expect to get the most suitable recommendation for your particular situation.
There are many surety bonds options in the market today. Some are set as requirements by council, county, state or federal governments. Others like fidelity bonds are not a requirement but have great benefits. Buying the right surety bond Minnesota gives you peace of mind. We are the bonding leaders in Minnesota so call us today for free quotes and requirements.