The surety is a type of contract aimed at regulating the legal relations between the contractor and his customers. It provides for the intervention of three parties: the contractor (or principal obligor), the beneficiary (the client of the contractor) and the guarantor (or guarantor) who is constituted by the company issuing the surety. Sureties work a bit like an insurance. In the event that someone demands something from you, the surety covers all kinds of expenses, although in the end you will be required to reimburse the guarantor. Basically, making a surety protects your customers from any difficulty, in the event that you are unable to pay.
Obtaining a Surety Bond
Make sure you really need a surety. Although “concluding a surety contract ” means obtaining the guarantee of the fulfillment of contractual obligations, many entrepreneurs mistakenly believe that it is necessary to stipulate a surety even when the law does not provide for it. Check for any need at the government offices responsible for controlling your industry. If you are looking to become a car dealer, you can contact, for example, the DMV ( Department of Motor Vehicles– the Department of Motorized Vehicles). Entrepreneurs who do not need to take out a surety to run their business can use a fidelity bond (a form of insurance protection that covers any losses of the policyholder in the event of fraudulent behavior by specific people) (more on this type of contract are given later).
Make sure you are eligible to take out a surety bond. By signing a surety, the guarantor will have to answer for your behavior. If you fail to do the job as planned, he will be the one to fulfill the obligations under the contract. Therefore, he will carefully evaluate your business before acting as a guarantor.
The most important component of obtaining a surety is the financial stability of your business. If you do not have a financial statement prepared by a certified public accountant (CPA), prepare it before contacting a guarantor, because he will evaluate the assets, cash flows and credit history that characterize your company.
The guarantor will also assess the integrity of your company. You can do this by contacting your business partners, but also your suppliers and customers. If they support you, you are more likely to take out a surety bond.
Finally, the guarantor will assess the longevity and capability of your business. If it has a stable and lasting history, this aspect will work in your favor. In addition, the supervisor will take care to ensure that you are not engaged in activities that may be beyond your abilities.
Choose a surety company. There are several surety companies operating around the world, specializing in certain industrial sectors or operating according to the size of the contract.
An effective way to have a comparison is to evaluate them through their rating. AM Best is a body that values surety companies, just like Moody ‘s and Standard & Poor ‘ s rating agencies do. The beneficiary may require the guarantor to have a minimum rating requirement.
You should also look into the processing time of the surety company. For example, companies that generally give guarantees to large contractors may have too long a turnaround time for smaller projects.
Finally, you should compare the rates between the different guarantors. Even a small difference could mean a large difference in the premium to be paid, if the capital to be guaranteed is high enough.
Apply for a surety bond. You can usually get a quote from a surety company for free or for a small fee. If the estimate is favorable, it is the case to request the surety using the form provided by the company. You will also have to give the necessary information regarding your business activity and specify the maximum capital to be guaranteed and, finally, sign a contract for the issuance of the guarantee.
It is essential to look for the right type of surety bond for your project. There are three common types. The bid bond , or guarantee of the offer, ensures that the contractor will enter into the contract in case he has obtained the job; performance bond , or performance bond, ensures that the contractor will perform the work as specified; payment bond , or guarantee for the repayment of an advance, ensures that the contractor will pay the contractor or supplier. Many construction projects include all three sureties.
Sign a compensation contract. Once the guarantor has approved your claim, you will need to sign a compensation contract that governs everything that falls within and outside the responsibility of the guarantor. Generally it is established that the contractor is required to cover all legal charges and costs that the guarantor will have to incur in the event of claims for compensation or complaints of default. Usually the contractor will have to pay a premium upon signing this contract.
Sign the surety agreement and send it to your client. After signing the compensation contract, you can sign the surety which, at this point, becomes legally binding. Once signed by the contractor and the guarantor, you should send it to your client (the beneficiary) for approval. The work can begin after the approval of the surety contract.
Understand the Principle of Contractual Liability and Other Options
Learn what happens when a claim or default complaint is filed. If a customer files a claim against you, the surety company will review it and decide whether to hold you responsible or to consider it invalid. If he agrees with you, then he will come to your rescue in the dispute. On the contrary, if he agrees to the customer, he will pay the costs deriving from the complaint in order to resolve the dispute.
Be prepared to reimburse the surety company for any expenses covered. Unfortunately, both the surety company and the guarantor are not the magic answer to all of your responsibilities. If the company agrees to the customer who made a request against you, paying the amount deriving from that request, you are the final manager who will reimburse the company for any consequent expenses and also the legal ones.
Imagine the surety like a credit card. In case you have to pay some customer request, the government orders a credit card with which you can actually pay the money you owe. In this way, the customer is guaranteed to be compensated if he does not comply with the law. Otherwise, the contractors could declare themselves insolvent and never give anyone a penny, creating a tear in the system. Therefore, the surety is a guarantee mechanism, evidently not for you, but for your customers.
Avoid receiving compensation claims at all costs! Since the role of the supervisor can become a problem, it is best to avoid resorting to him in the first place. Of course, you pay a premium every month, but you certainly don’t want to use the surety. It is a safety device in case something serious happens, not a remedy in difficult times. Here are several things you can do to avoid receiving compensation claims that trigger the guarantee mechanism:
Follow all regulations and laws set by the government for your industry sector. Keep up to date with all federal, state, and local ordinances that you are required to follow. The easiest way to get someone to file a compensation claim or non-performance report against you is to break the law, even if it is minimal or slight.
Resolve any possible disputes before they materialize. It’s about being able to relate to customers. Make sure all of them, even the intolerable one, feel unique and respected, because if they don’t, they’ll be much more likely to file a claim against you. Nip the problem in the bud before it becomes an unstoppable avalanche.
You need to know what to expect if you are a high-risk candidate. Being a high-risk candidate usually means that your FICO score is below the 650 threshold or that you have gone bankrupt, or something in between. The good news is that you can still apply for the surety bond, even if you are a high-risk candidate. The only difference between high and low risk lies in the premium you pay for the guarantee service. If your position is very risky for any reason, rest assured that you will have to pay a higher premium to get the surety.
Consider other types of collateral if you don’t necessarily need a surety. The sureties are not optional. Other types of collateral depend on your risk tolerance level. For example, what if you find that you don’t need to take out a surety to start a private security service? Would you still think of offering company management, investors and customers the peace of mind of a guarantee?
One way to offer a guarantee, in addition to the surety, is the so-called fidelity bond. Fidelity bonds are forms of guarantee that protect against fraudulent and dishonest acts perpetrated by someone in your company. If someone with the intention of voluntarily damaging it decides to enter into obligations on behalf of the company, the assets of the latter will not be affected.