A Guide to Surety Bond Basics for Small Businesses in Vermont

Surety bonds are used in a variety of situations to provide businesses, governments or individuals with guarantees. The type of surety bond that’s purchased depends on what the bond is being used for. Here are four common types of surety bonds that businesses in Vermont might come across.

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A Surety Bond Guide for Small Businesses

Bid Bonds Guarantee Bids

Certain types of work are awarded through a bidding process, in which interested businesses submit proposals for work that’s offered by a government, another business, or some other organization. After reviewing all submissions, the organization providing the work awards the project to the winning bidder -- and they rely on the winning bidder to do the work.

Bid bonds provide organizations that award work through a bid process with an assurance. If the winning bidder fails to do the work, either because they’re unable to or simply don’t want to, the bond may give the organization that awarded the work financial compensation. These bonds typically also guarantee that the winning bidder will purchase any required payment bonds and performance bonds (see below).

Bid bonds are frequently used in industries where businesses bid on large projects. A commercial construction business based in Montpelier, VT, for instance, might have to purchase this type of surety bond when submitting a proposal to do work for the State of Vermont.

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Payment Bonds Ensure Suppliers and Subcontractors Are Paid

Businesses that undertake major projects often rely on suppliers and subcontractors. If the suppliers and subcontractors used for a project aren’t paid in full and on time, a couple of issues may arise. First, the project may come to a halt if suppliers or subcontractors who aren’t paid refuse to provide any more materials or perform any more work. Second, they may seek the payments they’re due from the parties involved in the project.

Payment bonds ensure that suppliers and subcontractors are paid what they’re due. If a business fails to pay them, a payment bond will likely provide funding for the payments (assuming the payments are covered under the bond’s terms).

Payment bonds may be used by any business that enters into a contract which is dependent upon suppliers or subcontractors. Commercial contractors and vendors are two businesses that may need these types of bonds. Surety Bond Montpelier, VT

Performance Bonds Make Sure a Contract is Fulfilled

Businesses and organizations that enter into contracts with each other become reliant on one another. Each organization trusts that the other will uphold its portion of the contract. If either party fails to, the other organization may suffer.

Performance bonds help make sure that a business or organization does the work it’s contracted for, and that it does the work according to the terms and conditions of the contract. If an organization fails in its responsibilities, a performance bond may compensate the other party for financial losses it incurs as a result.

Performance bonds might be used by any business that’s entering into a contract. They’re usually, however, reserved for major contracts where both parties are heavily dependent on each other. Contractors, vendors, and major performers, for instance, might use these bonds.

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Ancillary Bonds Guarantee Non-Performance Parts of Contracts

Performance isn’t the only thing that can affect a project. Major projects are reliant on many things, and there could be an issue with any component that’s integral to the project.

Ancillary bonds provide a guarantee for parts of contracts that are integral but aren’t performance-related. If there’s an issue with a subordinate item that affects the fulfillment of a contract, this type of bond might offer compensation. These bonds are often used by the same types of businesses that use performance bonds.

Talk with an Agent Serving the Montpelier, VT Area About Surety Bonds

If you have a business that enters into large contracts, talk with an independent insurance agent in Montpelier, VT about any surety bond your business might need or want. An agent will be able to help you determine your business’ needs for bonds and find surety bonds that will meet those needs.

Topics: Vermont Insurance, Surety Bond

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