Surety Bond Basics: A Complete Beginner's Guide
Everything you need to know about surety bonds - what they are, how they work, and why you might need one
Last Updated: December 2025
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A surety bond is a three-party agreement that guarantees one party (the principal) will fulfill their obligations to another party (the obligee). If the principal fails, the surety company pays the claim and the principal must repay the surety. Think of it as a promise backed by a financially strong third party.
Principal
The party who purchases the bond and promises to fulfill an obligation. This is typically you - the contractor, business owner, or individual who needs the bond.
Obligee
The party protected by the bond. This is usually a government agency, project owner, or other entity requiring the bond as a form of financial protection.
Surety
The insurance company that issues the bond and guarantees the principal's performance. They pay valid claims and then seek reimbursement from the principal.
Requirement Identified
A government agency, project owner, or contract requires you to obtain a surety bond as a condition of doing business or winning a contract.
Application & Approval
You apply for the bond through a surety company or agent. They evaluate your credit, financials, and experience to determine your premium rate.
Bond Issuance
Once approved, you pay the premium (typically 1-15% of the bond amount annually) and receive your bond certificate to provide to the obligee.
Bond in Effect
The bond guarantees your performance for the term period. If you fulfill your obligations, nothing happens - you simply renew or let it expire.
If a Claim Occurs
If you fail to meet your obligations, the harmed party can file a claim against your bond. The surety investigates and may pay valid claims.
Indemnification
If the surety pays a claim, you must repay them the full amount plus costs. This is a key difference from insurance - you're ultimately responsible.
Contract Bonds
Guarantee contractors will complete projects according to contract terms
- Bid Bonds
- Performance Bonds
- Payment Bonds
Commercial Bonds
Required by government agencies for various business licenses
- License Bonds
- Permit Bonds
- Tax Bonds
Court Bonds
Required in legal proceedings to protect parties in litigation
- Appeal Bonds
- Guardian Bonds
- Fiduciary Bonds
Fidelity Bonds
Protect businesses from employee theft or dishonesty
- Employee Dishonesty
- ERISA Bonds
- Business Service Bonds
Surety Bonds
- Protects a third party (obligee) from your actions
- You must repay the surety for any claims paid
- Functions like a credit line with guarantee
- Usually required by law or contract
Insurance
- Protects you (the policyholder) from losses
- No repayment required after claims
- Transfers your risk to the insurer
- Usually voluntary risk management
Is a surety bond the same as insurance?
No, surety bonds and insurance are different. Insurance protects the policyholder from losses. A surety bond protects a third party (the obligee) from your actions. If a claim is paid, you must repay the surety company - it's more like a line of credit than insurance.
How much does a surety bond cost?
Surety bond costs (premiums) typically range from 1-15% of the bond amount annually, depending on your credit score, bond type, and risk factors. Someone with excellent credit might pay 1-3%, while those with poor credit may pay 5-15%.
What happens if a claim is filed against my bond?
The surety company investigates the claim. If valid, they may pay the claimant up to the bond amount. You are then legally obligated to repay the surety company the full amount paid plus any legal fees - this is called indemnification.
Can I get a surety bond with bad credit?
Yes, surety bonds are available for people with poor credit, though at higher rates. Some surety companies specialize in bad credit bonds. You may need to pay a higher premium or provide collateral.
How long does it take to get a surety bond?
Many standard surety bonds can be approved instantly online. More complex bonds (like large contract bonds) may take 1-5 business days as they require underwriting review of financial statements and other documentation.
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