What is a Surety Bond?
Surety bonds are often offered by insurance companies, but they’re more similar to a line of credit than an actual insurance policy. A bond gives a business a line of credit that they can use to compensate a customer or client if a product doesn’t meet minimum requirements or a project can’t be completed on time. Instead of keeping thousands of dollars in savings just in case, businesses can pay a premium for a bond and have access to funds should they need to compensate a customer or client.
This type of bond is an agreement between three parties:
1. The issuer of the bond, which supplies the line of credit
2. The obligee, which is the company providing the product or service
3. The principal, which is the organization that will receive the funds if there’s an issue with the product or project
The principal may be a direct customer or client, or it might be the State of Vermont. State licenses for certain kinds of businesses require a business to maintain a bond, line of credit, or minimum level of savings. A bond is usually the best option for these businesses. If there is a problem with a product or service, the bonds funds are given to the state, which then disburses them to the appropriate person or organization.