There are three types of surety bonds:
1. Bid Bond: Guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
2. Payment Bond: Guarantees that suppliers and subcontractors will be paid for work performed under the contract.
3. Performance Bond: Guarantees that the contractor will perform the contract in accordance with its terms and conditions.
Some types of businesses that are required to purchase bonds to secure licensing include car dealers, mortgage brokers, loan officers, professionals in healthcare, professionals handling or administering an estate, and construction contractors.
A surety bond is a form of guarantee for contract completion. An obligee (or business) seeks a principal (or contractor) to fulfill a contract. But the business who is hiring the contractor wants to be assured that the project will be completed as required. To insure the business a successful delivery of the contract, the contractor buys a surety bond so the surety company becomes responsible for the contractor’s obligations. If the contractor defaults, the surety company can either find someone else to fulfill the contract or compensate the financial losses of the obligee. In other words, the surety assures a successful contract because it assumes all financial obligations if the contractor does not deliver.