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How To Buy Surety Bonds

A surety bond is an agreement between three parties to ensure a product or service is delivered according to a contract. The three parties involved are the principal, obligee and surety. Surety bonds are most often used in the construction industry and ensure that the principal, the company building the project, delivers on the contract to the obligee and if they fail to do so then the surety guarantees that the job is completed and collects damages from the principal. So now that you know how a surety bond works the question is how do you go about buying one on the open market.

Most large insurance companies will issue surety bonds or have specialized departments within the organization which handles these types of issuances. Of course, as with any organization you're giving money to, you want to ensure they are reputable and honest. A good way to do that is to compare what you find online or in the phone book against the Treasury Department's List of Approved Companies. Surety bond applications are not simple and require detailed information so it's better to work with a local issuer than one out-of-state in case you need help during the application process.

Some of the various pieces of information you may need to provide during the application process is an overview of your company, including what your business does, how many employees you have any subcontractors you use during construction. You also need to provide a copy of the contract and any specifics about the job which may affect what is required of the surety bond in terms of price and scope. The surety bond underwriting company uses all of this information to form a complete picture of the risk and obligations inherent to the construction project and will use this as a basis for determining the bond premium.

Most surety bond underwriters don't just want a general picture of the project in question but also the overall financial health of the builder. They will often require a CPA certified year-end financial statement for a minimum of three years. If there are partners in the organization or primary shareholders they will also need to provide personal financial information as they may be legally responsible should the project fail. Financial documents required don't just include what you provide to the underwriter but may require information directly from financial organizations you do business with such as your bank or credit union. Outstanding loans and lines of credit as well as bank balances may be required and might need to be provided directly from the financial institution.

Now that the surety bond underwriter or insurance company has a clear picture of what the project entails including the financials of the principal, they still need to know whether or not you reliably complete projects. A list of recently completed similar in scale projects may also be required to demonstrate your company's ability to successfully and consistently complete jobs. Since most construction is never done solely in house and will use outside subcontractors, it makes sense to include references from various suppliers when applying for a surety bond. These reference letters normally seek information on the quality of the work delivered and if it was completed on time and on budget.

As you can tell, buying surety bonds is not a simple process but involves detailed information from multiple parties to ensure that you are able deliver large scale projects to completion. Developing a close relationship with your bond agent will go a long way towards simplifying the application process especially if they are familiar with your company, its principles and its track record. Surety bond issuers assume a lot of risk, especially on large-scale projects, so the more comfortable you are able to make them the more likely you are to have them issue a surety bond in your favor.