Surety Bond Basics

Surety Bond Basics

Surety bonds are legally binding contracts between the person providing the service, the person receiving the service, and the entity guaranteeing the service. A surety company in New Jersey issues bonds that work like lines of credit, providing backup just in case the person or entity that purchases the bonds cannot or does not fulfill the terms of the agreement.

Three Parties

There are three parties involved in a surety bond agreement:

  • Principal – the person who purchases the bond, such as the contractor on a construction project
  • Obligee – the person who requires the bond, such as the investor or a government agency
  • Surety – the company that guarantees the work

Bond Specifications

Principals may pay a premium anywhere between 1% and 15%, depending on how big a financial risk they and their projects are. Lower risk factors, such as outstanding personal credit and a thriving business, typically mean lower premiums. Most bonds guarantee between ten and 15 times the amount of equity a business has built. The amount of working capital a company has can also affect how much the surety company will guarantee.

Although there are many types of surety bonds, they all function to protect vulnerable parties from loss. You can purchase bonds from a surety company in New Jersey to ensure that your investors, clients or other entities are covered.

 

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