What Is a Financial Guarantee Bond?
Financial guarantee bonds are one of the main types of surety bonds. They are indemnity bonds which cannot be cancelled. Their goal is to guarantee all due payments that a party owes to another will be made in full and in due time.
Financial guarantee bonds constitute a three-party contractual agreement. The party that has to get bonded is the principal. The entity that requires the bonding is the obligee. The surety, or guarantor, is the underwriter of the bond, which provides the financial backing.
Because in essence they ensures payments, financial guarantee bonds work much like an extra line of credit for the bonded party. In case they fail to make a payment, the surety can temporarily take over and cover the outstanding amounts to the obligee. For more information on how bond claims are handled, please see the end of this page.
Sales tax bonds are required from a wide range of businesses. They ensure the timely payment of taxes and other relevant fees that companies owe to tax authorities.
Local, city and state authorities usually require liquor tax bonds from businesses who want to manufacture or sell alcohol. This subtype of sales tax bonds guarantee that the alcohol manufacturer or seller will pay all due taxes and fees incurred in their work.
Utility bonds may be required of businesses who want to set up offices and start using the services of utility companies such as water, gas and electricity. Providers may ask for such bonds to ensure they will get full payment of incurred bills.
All freight brokers and forwarders in the U.S. need to get a $75,000 surety bond before they obtain their federal license. The bond guarantees they will make all due payments to their business partners, i.e. shippers and carriers.
The surety bond cost that you need to cover depends on two main factors: the bond amount you are asked to post, and your personal and business finances. You don’t have to pay the whole bond amount to get bonded. The bond premium you have to cover is a few percents of this amount. In case your finances are in good shape, you can expect a bond rate between 1% and 5%.
When you apply for a bond, the surety will need to examine your personal credit score, business documents, as well as assets and liquidity, if you have such. On the basis of their strength, it will assess how risky it is to get you bonded. Namely, it will judge how likely you are to cover bond claim costs if the need arises.
You can obtain a bond even if your finances are far from perfect. Lance Surety Bonds’ Bad Credit Program can help. Your bond premium will be a bit higher - in the range of 5%-15%, but you can still get the bond you need.
The purpose of the financial guarantee bond is to protect the interests of the obligee by ensuring that due payments will be made in full and in a timely way. If the principal fails to cover the payments, the affected party can file a bond claim.
When a claim is made which cannot be resolved, the surety investigates the case. If it is proven that the principal transgressed from their legal obligations, the guarantor has to satisfy their part of the bond contract by providing an appropriate financial reimbursement to the obligee. The claim can be up to the bond amount posted by the bonded party.
Due to the indemnity agreement that the principal signs with the surety at the time of the bonding, all payments made by the surety to the obligee then need to be compensated by the principal.