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What is a bond in business? The banner shows a buildings and sky with a colored white background.

What is a bond in business?

Business Bond

Performance bond application - This image shows a monitor, mouse, keyboard, and a touch mouse with a colored white background. The most common bond in business is a surety bond known as a performance and payment bond. There are other types of bonds, called fiduciary bonds. Plus there are hundreds of other types. Let's discuss the major ones first. We'll have a list of the others at the bed.

A performance and payment bond is typically used in construction jobs. What happens is that the owner of a construction job will have a job site and ask multiple contractors to bid on the job. When the contractor is awarded the job, they will have to post a performance bond. The performance bond is provided by a surety, which is normally a large insurance company like aig or Zurich. The surety provides the performance bond to the site owner that guarantees that the contractor will build according to the job terms and at the times set forth in the agreement. The payment bond makes sure that the contractor will pay his subcontractors and material providers.

Here is a short list of other bonds:

  • Administrator Bond. An administrator bond is a bond required by a court of law for someone who is acting as the administrator in a probate case (technically, an intestate estate). This bond protects beneficiaries and creditors from dishonesty or willful negligence on the part of the person acting as administrator.
  • Agents, Athletic Bond. More commonly known as a sports agent bond, this type of bond is required by certain states. This bond is really a sub-species of a license or permit bond. This bond provides that the sports agent will act according to the rules and abide by the terms of the agency contract (that is, they will not take any additional funds above and beyond those found in the agency agreement).
    Broker, Freight Bond. A freight broker bond is required for your freight business. It protects motor carriers and shippers according to the FMCSA rules and regulations. The typical claim is made when a motor carrier is not made.
  • Cemetery licensee Bond. Certain states require a cemetery to have a license bond. This bond makes sure that the cemetery operators will abide by the rules and regulations within that state.lowest cost for bonds
    Collection Agency Bond. Collection agencies are required to have a bond, in certain states, before they are issued a license to collect funds from debtors in that state. These are also known as debt collector bonds.
  • Cigarette Tax Bond. These bonds are issued by proprietors that sell cigarettes. These bonds are required by the state before you are issued a license to sell cigarettes and they guarantee that the taxes will be paid to the state.
  • City Ordinance Compliance Bond. This is really a catch-all term used to show that a business is complying with the various rules and requirements of a city’s ordinances. In New York City, these are pretty common, while in the Midwest are fairly rare.
  • Concessionaire Bond. A concessionaire bond is required in certain areas for persons wanting to open a concession stand. Again, these bonds make certain that you are operating in accordance with the various codes. Side note: one of the main impetus’ for food trucks was their ability to operate without this type of bond or under the same rules.
    Contractor’s License Bond. A contractor’s license bond is required in certain states before a contractor can perform any work. In Oregon, the contractors state license board is a central part of this.
  • Private Eye/Detective Agency Bond. Dick Tracy, move over, it’s a new world. Instead of just opening up a private detective shop in the basement, many municipalities require a bond. This keeps private eyes on the up and up and within the bounds of the law. Well, at least as much as possible.
    Bond protecting against a Defective Title. When selling a vehicle, most people just simply pass title. However, in certain circumstances, the title has been lost or there is some other problem. In these cases, the state will transfer title, but only if a bond is issued. That way, the buyer can be assured that there is not a defective title and will therefore transfer title.
  • Employment Agency – Surety Bond. Different rules apply to employment agencies around the country, but the basic rules apply in that a bond is required to make sure that all rules are being followed, taxes being collected and other payments being made.Honest lawyer building
    FHA Bond (Federal Housing Authority). A FHA bond is required for business to offer certain types of FHA loans. Thus, a mortgage broker could have a bond instead of having their financials audited (a much cheaper option to be sure).
  • Fidelity Bond. A fidelity bond is one of the oldest uses of bond in the world. A fidelity bond is simply an agreement for one party (the surety) to provide assurance to another party that the person being guaranteed will live up to the terms of the agreement. Fidelity bonds are usually personal in nature.
    Fiduciary relationship Bond. This type of bond is required when a fiduciary relationship is created, such as when a person is an executor of a will in a court proceeding (it could also be used by a guardian/conservator). Thus, the fiduciary enters into a bond so that the beneficiaries are assured that no malfeasance will occur.
  • Fuel Tax Bond. This bond is needed by fuel sellers. Also known as an IFTA bond, it helps provide assurance that taxes will be paid by the fuel seller.
    Health/Fitness Club Bond. Many locations require a bond by a health club as there are a variety of rules and regulations that apply to them, including certain taxes and other health codes and related permits.
    Home Seller (Dealer) Bond (Mobile Home Dealer). Mobile home sellers have a requirement for a dealer bond. This bond protects against dishonest sellers. These bonds protects consumers from misrepresentation, fraud and other perceived bad dealings in the mobile home market.
  • Home Improvement Repair Professional Bond. Some states require a bond for handyman services, known as a home improvement repair bond. These bonds protect against fraud, misrepresentation and theft.
    Hunting & Fishing License Bond. These bonds are required by those that sell fishing and hunting licenses. The states of Florida and New Jersey have a lot of business that require these bonds.
  • Insurance Broker – Surety Bond. Some states require that insurance brokers become bonded. These bonds protect consumers against misrepresentation and broker problems that they have no insight into.
    Dealer Motor Vehicle Bond. A motor vehicle dealer bond is required for most states for those that want to sell vehicles. Especially necessary in the used car market, these bonds protect both consumers against fraud as well as the state to make sure that proper regulations are followed.
  • Payday Lending Bond. Payday lending has been increasingly within the spotlight in recent years. Given the increased scrutiny and negative public perception, bonds are now being required by most areas. These bonds are for those that want to get into the payday lending area and are needed prior to issuing a license to set up a payday lending operation.
  • Pest Eradication Bond. Pest control companies are now seeing a requirement for bonds. These bonds protect consumers to make sure that the pest control company has the proper permits, especially with the handling and disposal of the harmful chemicals that can be used.
    Plumbing Business Bond. Some states require plumbers to get a bond prior to being licensed. These plumber business bonds are needed to protect consumers from fraudulent home repair/installation practitioners.
    Pre-need Funeral Sales and Service Bond. A pre-need funeral bond is required by certain states (like North Dakota) prior to issuing a state license.
    Private Detective (Investigator) Bond (for a personal license). This is similar to the one required for an entire agency. Single agents also need a bond for their personal license. This is a great example of a fidelity bond.
  • Probate and Court Bond. A probate bond protects the heirs or beneficiaries of an estate from any malfeasance or other problems caused by the administrator or executor. A court bond is usually needed for appeals or other specialized court needs.
  • Public Official Fidelity Bond. Public officials may be required to put up a bond to make sure that they uphold their duties in good faith. These are especially used for public officials that have access to funds or other private information, such as the county clerk. These are some of the oldest types of bonds that have been issued. In the 1800’s, these were standard in many public offices and were usually granted by another individual.
  • Roofers Bond. Roofing companies, in some states, are required to obtain a bond prior to getting a home improvement/installation license.
  • Sales and Use Tax Bond. This bond is required by your local state government for business that are involved in retail sales, or that rent goods or leases. The bond protects the government and makes sure that it will received its taxes by the retail business.
  • License Bond, Signs and Advertising. Given that advertising, especially for signs (drive down the highway and you’ll see what I mean), can be a difficult business, a bond is required to make certain the the signs abide by all local laws and regulations.
  • Small Business Loan Bond. Lenders to small businesses are required to get a bond. These bonds protect consumers against deceptive sales practices as the perception is that small businesses are not as sophisticated and may not fully understand the consequences of their actions.
  • Surplus Insurance Lines Broker Sales Bond. Large insurance carriers need to carry a bond to ensure that their capital does not become impaired. These bonds protect against improper sales in the business for surplus lines.
  • Tax Preparation Bond. Tax preparers, like H&R Block or Liberty Tax, have to become bonded. Most states require these bonds now, which is an outgrowth of the tax fraud cases of several years ago (not against H&R Block, though) where tax preparers were filing returns that they knew were improper.
  • Real Estate Title Bond. Title companies, in many jurisdictions, are required to have a bond. This is needed as the real estate market needs to have assurance that title companies will be around in case of claims against titles.
  • Transportation Bond. These bonds provide assurance for payment regarding shipments of good within any of the United States. These bonds make sure that carriers can get paid, which helps facilitate the flow of commerce.
  • Utility Deposit Bonds. A utility deposit bond is a guarantee that a party will pay their utility bill on time. Usually used in large-scale projects, these are not typically used for consumers.
  • Warranty (Product or Otherwise) Bond. A warranty bond makes sure that a contractor performs work according to the owners’ satisfaction. It further provides assurance that the work being done meets all applicable codes and other statutory requirements.
  • Wholesale Distribution of Fuel (non-retail) Bond. Wholesale distributors are required to put up a bond to make sure that all applicable laws are being followed and that taxes are being withheld and paid properly.
  • Maintenance (construction) Bond. This bond provides a guaranty that the work that was done by a contractor will meet the needs of the owner for a completed project. These bonds are typically set in time, like one year.Picture of maintenance construction site
  • Payment Bond. This type of bond is usually given by a contractor (usually a general contractor) and it provides that the material suppliers and subcontractors will receive payment. In contracts with the federal government (over $30,000), they are required. This rule is known as the Miller Act, and state laws with the same requirement are known as Little Miller Acts.
  • Performance Bond. A performance bond simply requires that a company will perform according to the terms of the contract. See our page for more.
    Bid Bond. A bid bond is a bond that states that a contractor that bids on a project, if awarded that contract, will actually go ahead with the terms of the contract. Thus, if you get a bid bond, and then you get awarded the contract, that you can get a final bond and are willing to provide the services that were bid on. These are usually called only when the contractor has a change in their underlying financials or if they got a better job and are willing to pay the bid bond default rate and walk away.
  • Site Improvement Bond. This is specific type of surety bond that only applies to a specific site. This can be tricky, especially when done for clean-up sites.
  • Subdivision Construction/HOA Bond. These bonds are issued to protect the public regarding construction within specified subdivisions. Contractors have to get these bonds to make sure that they perform according to the terms of the contract as well as the terms of the subdivision specifications.
  • Supply Bond. A supply bond is a specialty type of surety bond. It guarantees that the supplier of goods will provide all materials according to the terms of the contract between the purchaser and supplier.

Learn more about What are business bonds?

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