For certain industries, surety bonds give businesses a competitive edge over competitors. But in several fields, businesses have to purchase surety bonds to receive a business license. Consumers and businesses should know when bonds are legal obligations so that goods and services are lawfully provided.

Surety bonds are three-party agreements that give customers peace of mind. Businesses, such as car dealerships, private contractors and janitorial services, buy the bonds from insurance or surety companies.
The surety guarantees financial recompense to consumers if the hired business fails to perform according to contractual agreements, or acts unethically. States and local governments nationwide often require businesses to buy a surety bond, thus protecting consumers.

For example, a mortgage broker in California must post a California surety bond. The amount of the bond depends on the average loan volume the broker handles each year, but runs between $10,000 and $50,000. If the broker acts dishonestly, the consumer is protected by the bond. Some of those unethical acts include coercing buyers into high-risk loans, charging additional fees, and telling buyers to act fraudulently during the application process.

When the broker commits a wrongful act, the customer can file a claim against the bond. If the surety validates the claim, the customer is compensated for any losses by the broker. However, the surety covers the repayment if the broker cannot afford to do so.

But surety bonds are not confined to California and the USA. Performance bonds are common to the Western world, South America, Japan and Korea. Contractors who win project bids buy these bonds.

By buying the bond, the contractor is responsible for every contractual agreement. If it fails to live up to the contract or simply bails on the project, the hiring party has the right to file a claim.

In Australia and the United Kingdom, companies have to buy license bonds in certain industries. Similar to license bonds in the US, businesses are required by law to purchase a bond. Otherwise, the businesses cannot legally operate.

Worldwide, governments make surety bonds a requirement just to license businesses in particular fields. These mandates protect consumers from financial and legal burdens at the hands of unfair businesses.

This article is written by a guest author. The views expressed in this article are the views of the guest author. This blog may or may not hold the same views.

Kevin Kaiser is a principal for SuretyBonds.com, the nationwide leader in surety bonds, where he has started the Surety Bond Education Program to inform all people about the uses of surety bonds.