It is impossible to run a business without being required to either purchase or sell services to another business. While it is always wise to legalize the transactions, entering into a business contract can be a scary thing for both parties; even more so if they fail to utilize surety bonds. If the selling party fails to meet demand, provides subpar quality compared to their samples, or uses underhanded business tactics that could damage reputations, the purchasing party may very well be legally barred from doing business with another company, only to be left with a failed project and huge losses.

On the other hand, the selling party could provide excellent services and or products, charge a reasonable rate, and find that their customer has run out of funds, or worse, is going into bankruptcy. In the best-case scenario, the selling company will have an overstock of product that they can attempt to sell at discounted rates, but the greatest likelihood is that they will be strung along with false hopes and empty promises. While proper wording of a contract may offer some legal recourse, if the party who has failed to meet obligations has no funds or has already closed its doors, the damages could be become catastrophic.

This is the point where surety bonds become an absolute necessity; however, this does not explain what they are. So, what is a surety bond? In its simplest form, a surety bond acts as a form of insurance, usually at the time of contract, which guarantees the quality and/or payment of services and products rendered. Depending on the purpose of the contract, and the exact work that is being performed, a third party may be called in to handle negotiations and determine an actual breach of contract.

So, after all this information, what is a performance bond and what purpose do they hold? Performance bonds are specialty surety bonds that are issued by an insurance company to help cover for monetary damages due to poor workmanship, untimely delivery, or any other breach of contract. Any time a breach of contract is suspected, the insurance company will step in to determine the legitimacy and extent of the damages, and will compensate the obligee (purchasing party) to cure the problem.

While surety bonds seem to act very much like insurance, and performance surety bonds are provided by insurance companies, surety bonds are NOT insurance. Rather, these bonds are just that: money bonds that are held in reserve by a bank or insurance company with the expectation of being released to the wronged party in the event that a contract is broken, or to the submitting party upon contract completion. In other words, the performance surety bonds will only pay for damages up to the amount available in the bond, and any additional compensation will still need to be received through secondary agreements, or as follow-up to legal action.