bonding tutorial
how it all began
Surety bonds have been used for thousands of years to guarantee business transactions involving buyers and sellers who don’t know each other.
Many centuries ago, in about the year 2750 BC, surety bonding began as a simple three-way agreement between a king, a young farmer, and a local spice merchant. The farmer, who came from a faraway land, presented the king with a proposal: he would care for the king’s wheat fields in exchange for seven gold coins. Never having met this farmer before, the king was uneasy and declined the farmer’s offer.
To give the king peace of mind, the farmer sought the help of a well-respected local spice merchant who was originally from the same faraway land as the farmer. The spice merchant met with the king and personally guaranteed the young farmer’s performance. If the farmer failed to tend the wheat fields properly, the merchant would either find another farmer to do the work or repay the gold. In return for the merchant’s favor, the young farmer paid the merchant one gold coin. Because the farmer knew that he would do a good job, he in turn promised to repay the merchant for any loss suffered if the king’s fields were not properly tended.
With this promise and financial guarantee from the merchant he knew and trusted, the king hired the young farmer. The wheat fields prospered, and the surety bond concept was born.
surety bonds today
Surety bonding has weathered the test of time. Of course, bonds today are provided by surety companies, but the basic idea is still the same. Surety bonds signal professional competence and offer financial security. They help forge trusting business relationships.
Construction contractors, cleaning services, software designers — all use surety bonds to win business and protect their customers. Many employers, such as banks and jewelers, require their employees to be bonded by a surety company in order to protect their assets. One of the newest and most innovative uses of surety bonds is to guarantee online commerce transactions, such as online auctions, in which the buyers and sellers do not know each other.
the protection
A surety bond is a straightforward three-way agreement with a surety company guaranteeing that an individual or company (the bond principal) will do exactly what it commits to its customer (the obligee). If the bonded individual or company does not fulfill its obligations, the surety company will compensate the customer for the loss.
In practice, bonds are written with no expectation of loss. The fundamental concept of surety bonding is that because the bonded company has a stellar record and reputation, default and non-performance are highly unlikely. A surety bond is written with the belief that the bonded party will either perform his or her obligations or reimburse the surety company in the event of default. The pre-qualification process included in surety bond underwriting is intended to minimize the risk of loss.
the qualification process
To determine whether someone is a safe player or a risky player, surety companies conduct a careful and rigorous qualification review of any individual or company that wants to be bonded. Experience, reputation, financial stability, verifiable identity, and a successful track record for meeting obligations are all considered during the review process.
If a bonded party causes a loss, it is his or her responsibility to correct the problem, just as it was before the bonding. The surety company is basically a “co-signer” that becomes responsible if the bonded party defaults. For this reason, only the most professional, trustworthy people are qualified as “bondable.”
a proven solution
Surety bonding still works in the same way as it did almost 50 centuries ago. A surety company, like the spice merchant in the original bonding transaction, lends its expertise, credibility, insights, and financial assets to a business transaction so that both parties get what they desire. The seller, like the young farmer, gets a customer he or she might not otherwise have, and the buyer, like the king, gets the desired product or service with freedom from worry.
