Understanding the purpose of a financial guaranty bond can be a little bit tricky if you aren’t familiar with why surety bonds are commonly used. A surety bond acts as a contractual agreement between two parties (the project owner and the provider of services) guaranteeing that the project will be done according to the agreed conditions.
Financial guarantees are bonds that cannot be canceled. Their purpose is to account for all payments between parties, ensuring they are paid in full and according to the timeline agreed upon. These bonds are actually a three-party agreement, as there is another party financially backing the bond.
If you need to secure a financial guaranty bond for a project, your cost will take into account how much you need to front for to price of the bond and your personal or business finances. You generally only have to pay a few percents of the amount requested. However, the surety will take into account the following:
- Your credit score
- Business documentation
- Personal or business assets
- Business liquidity
The risk involved for the surety will be determined once these items have been reviewed. If you fail to make payments to your contractor, the surety may temporarily cover the obligations. This happens through a bond claim process, which can be discussed with your surety as needed.