3 Types of Surety Bonds and the Small Businesses That Need Them

Several different types of surety bonds are used in commercial situations to give the business, government or individual being served a guarantee. Exactly which commercial surety bond is used in a situation depends on what type of assurance is needed. Here’s a guide to three types of surety bonds that small businesses sometimes purchase as a guarantee for their customers.

Bid Bonds Are Used When Bidding on Contracts

Bid bonds are typically used in situations when businesses bid on work that’s awarded by either another business or a government entity .

In these situations, the business or organization awarding the work is relying on the winning bidder to enter into the contract and the bid bond acts as a qualifier since the surety will perform underwriting to determine that the bidder is qualified for the work that is being bid and  complete the work they propose in their bid. A bid bond serves as a guarantee that the winning bidder will enter into the contract to perform the work they propose. Should a winning bidder fail to enter into the contract, the bid bond is used as a penality to cover the cost of rebidding or the cost difference for the next lowest bidder for the proposed work, a bid bond will compensate the business or government that relied on awarded the work to transition into a signed contract and with the promise that performance and payment bonds will be issued going forward and before the start of the contract .

Bid bonds are used in a variety of settings where businesses bid on large projects. Some examples of small businesses that may need to get these bonds include:

  • Commercial construction companies
  • Home builders that are contracted to develop entire neighborhoods
  • Manufacturing companies that fulfill contracts for government agencies
  • Cleaning companies that provide contracted janitorial services for buildings

Even though only one business is awarded the work at the end of a bidding process, bid bonds are typically purchased by all businesses that bid on a project. Having this type of surety bond in place for all bids lets the business or government that’s awarding work choose the lowest  bid with confidence.

Payment Bonds Are Used When Hiring Subcontractors or Using Suppliers and typically go hand in hand with the Performance Bonds that guarantee contract performance

Payment bonds are used by businesses that rely on subcontractors or suppliers to complete work the business has been contracted to do.

In situations where a business uses subcontractors or suppliers, the business must be able to pay its subcontractors and suppliers. If the business is unable to make on-time payments, the subcontractors or suppliers may cease working with the business until they’re paid, which can jeopardize the business’ project.

Payment bonds serve as a guarantee that the subcontractors or suppliers of a business  will be paid in full. Should a business be unable to make its payments, a payment bond will fulfill the financial obligation so that subcontractors and suppliers will continue working with the business and the business’ project can move forward or even after the contract is completed so that the subcontractors and suppliers are offered some protection from payment default since it is more difficult to make a claim for payment on a government entity .

These types of bonds might be purchased by small businesses that contract to build or make a product, such as manufacturers or home builders or contracting to government entities. They also are sometimes purchased by small businesses that offer contracted services, such as vendors and security firms.

Ancillary Bonds Are Used to Protect Against Risks a Business Can’t Control

Ancillary bonds are also used in contract situations, but they protect against risks other than those of bid and payment bonds.

If you need help finding the right commercial surety bonds for your business, contact us at The Service Insurance Company and go to our website to see FAQ’s and more about performance bonds.