INTRODUCTION
Surety bonds play an important role in helping businesses succeed in different industries. They are especially useful for companies working on international contracts, where the agreements can be more complicated. To better understand how surety bonds work, we spoke with Nicholas Verna, Regional Head of Surety at Allianz Trade Americas. In this article, we answer some of the most common questions about surety bonds in simple terms. For more information and detailed insights, visit the Alpha Surety Bonds website.
WHAT TYPES OF COMPANIES AND INDUSTRIES USE SURETY BONDS?
Some industries, such as construction and machinery, frequently use surety bonds. However, many other industries also rely on them, including energy, logistics, and commodities. The most common types include bid bonds, performance bonds, warranty bonds, and payment bonds.
WHO NEEDS SURETY BONDS AND WHEN?
When a company or project owner hires a contractor or service provider, they often require financial security to ensure that the work will be completed as promised. If the contractor fails to meet the agreement, the surety bond provides compensation. These bonds are typically issued by insurance companies or banks. Businesses working on government contracts or large private projects often need surety bonds to protect both parties involved.
WHAT ARE THE MAIN TYPES OF SURETY BONDS AND HOW DO THEY DIFFER?
There are two main categories of surety bonds: contract bonds and commercial bonds.
CONTRACT BONDS
These bonds are mainly used in construction projects. They guarantee that contractors finish projects on schedule. Examples include:
- Performance Bonds – Guarantee that the contractor will finish the work as required.
- Payment Bonds – Ensure that suppliers and workers get paid for their services.
- Maintenance Bonds – Cover any defects in construction after the project is completed.
These bonds can be used for various projects, such as building hospitals, bridges, or real estate developments.
COMMERCIAL BONDS
These bonds are not related to specific construction contracts but serve different purposes in business. Examples include:
- Court Bonds – Required when someone is appealing a lawsuit. The bond ensures that the required payments will be made if the appeal is unsuccessful.
- Compliance Bonds – Ensure that businesses follow licensing requirements and regulations. For example, a construction company may need a bond to guarantee that they will restore the land they have worked on.
- Concession Bonds – Required when a company is granted permission to operate a public service, such as managing public transportation or running food services in a stadium.
DO THE RULES FOR SURETY BONDS DIFFER BY COUNTRY AND RELIGION?
Yes, the rules for surety bonds vary widely across different countries. In the U.S., surety bonds are often required by law, especially for public projects. This makes the U.S. the largest surety bond market, with over $14 billion in bonds issued in 2021. If a project is funded by public money, a bond is required to ensure the work is completed properly. However, private companies may also require surety bonds for added security.
In the U.S., construction companies must provide 100% performance or payment bonds to secure a contract. If they fail to meet their obligations, the bond issuer can hire another contractor to complete the work. In contrast, in Europe, surety bonds often cover only 10-30% of the contract’s value, and if a company defaults, the bond provides direct compensation to the project owner.
WHY IS INTERNATIONAL REACH IMPORTANT WHEN CHOOSING A SURETY PROVIDER?
When businesses need surety bonds for international contracts, working with a provider that has a global network can save time and money. Companies like Allianz Trade have offices worldwide, allowing them to issue bonds quickly and efficiently. Their local underwriting teams understand the requirements of different countries, making the process smoother.
Without a global provider, companies may have to use local third-party services, which can increase costs and delays. Large companies often need bond facilities worth millions of dollars to support multiple contracts in different countries. However, even small and medium-sized businesses can benefit from surety bonds, with some requiring bonds as low as $500,000.
WHAT ARE THE DIFFERENCES BETWEEN A SURETY ISSUED BY AN INSURANCE COMPANY AND A BANK GUARANTEE?
Both insurance companies and banks can issue surety bonds, but there are key differences. Here are four main reasons businesses may choose an insurance provider over a bank:
- Preserves Credit Lines – Surety bonds from insurers do not use a company’s bank credit line, leaving more liquidity available for other needs.
- Local Support – Global insurance companies like Allianz Trade provide local support in different countries, with experts who understand specific regulations.
- Core Product Offering – For insurers, surety bonds are a main service, whereas banks may not specialize in them.
- Strong Credit Ratings – Large insurance companies often have strong credit ratings, which can make their surety bonds more attractive to clients and brokers.
CAN SURETY BONDS COVER JOINT VENTURES AS WELL AS SINGLE PROJECTS?
Yes, surety bonds can cover joint ventures and projects that involve multiple companies. Some large projects require bonds that exceed what a single provider can handle. In these cases, multiple surety companies or banks work together to issue the necessary bonds.
For example, in major infrastructure projects like building a railway system, different contractors may specialize in tracks, railcars, and tunnels. These companies may form a joint venture, and each may need its own surety bond. If the project involves international companies, one branch of a surety provider may issue a bond for a U.S. company, while another branch handles the bond for a foreign partner.
WHAT ROLE DO BROKERS PLAY IN THE SURETY BOND INDUSTRY?
Brokers play a crucial role in the surety bond process by helping businesses find the right bonds and providers. In the U.S., surety bonds are mostly broker-driven, meaning brokers connect businesses with bond issuers and ensure they get the best terms. Brokers also provide insight into different surety products and extend the reach of providers by offering local expertise.
As surety bonds become more popular worldwide, brokers are increasingly involved in simplifying your loan journey and helping businesses secure the right bonds for their needs.
CONCLUSION
Surety bonds provide businesses with financial security and help them meet contract requirements. They are used across many industries and can be essential for both small projects and large international contracts. Since the rules and requirements for surety bonds vary by region, businesses should work with a provider that understands local regulations and can offer fast and reliable service.
