Financial Guarantee Surety Bond
A financial guarantee bond is not a single specific type of bond, but is instead a term which is applied to many different kinds of bonds that are used to guarantee the payment of financial obligations which a bonded party has to another party. That other party is known as the obligee, and it is generally the state itself or the public, which is receiving protection in the event that the bond purchaser, known as the principal, defaults on those payments. Such payments can be for taxes, leases, penalties, fees, or any other financial obligation which the principal may have with the obligee.
There is a third party in this contractual agreement, and that is the surety company which issues the bond to the principal. In the event that the principal fails to live up to payment obligations, those payments would be made by the surety company, following a claim against the bond by the obligee. According to CNA, The surety bonding company would then attempt to recover any lost funds by getting them from the principal, whose default led to the claim being made. Compensation owed to the surety bonding company can be for the entire amount of the financial guarantee surety bond, if that is the amount specified by a valid claim against the bond.
How they are different
These bonds are different from typical indemnity bonds in that they are strictly related to making payments in the proper amount and at the proper time. Typically, indemnity bonds are based on the execution of specific obligations such as the performance of specified duties by a contractor, or for instance, an auto dealer’s pledge to conduct business in an honest fashion. Those cases have no financial obligation component in them, and are based on performance or nonperformance of the principal.
Although this constitutes a significant difference in the nature of the bond, the requirements are essentially the same, since financial guarantee bonds and all other types of bonds are agreements to comply with specific requirements. There may be other differences associated with financial guarantee bonds as well, such as a specific time element by which payments must be made.
Cost of this kind of bond
The cost of a guarantee bond will always be some percentage of the face value of the bond amount. Depending on the guarantee bond which is being purchased, the cost can be significantly different. While some bonds such as freight broker license bonds are always fixed at the same amount, i.e. $75,000, other types of bonds can have many different face value amounts, which means the cost would vary dramatically.
The actual cost of your financial guarantee surety bond will be based on your credit history and score, as well as several other factors, such as work experience and financial status. Bond purchasers with an excellent credit score can generally expect to pay a cost of between 1% and 5% of the bond’s face value, whereas purchasers with lower credit scores are likely to have to pay more.
When a claim is made
This type of bond is always conditioned on the payment of some financial obligation to the obligee party in the agreement. The wording of the obligation will be different on every bond, so in order for a claim to be made against the bond, there must be a clear violation of the fulfillment terms on the part of the principal. For this reason, very specific language is used in preparing financial guarantee bonds, so that the grounds for defaulting are quite apparent.
According to the SFAA, when the bonded party does fail to live up to the financial obligations specified in the bond, the obligee can make a claim against on bond to be reimbursed for those failed payments. Assuming the claim is found to be a valid one, the surety company would then be obliged to make good on the full amount of the claim made. As previously mentioned, the surety company would then seek to recover that entire amount from the principal.
As previously stated, there are many different types of bonds which fall under the umbrella of financial guarantee bonds, and some of the most popular of these will be discussed in this section. A fuel tax bond must be posted by a business which distributes or sells fuel, for the purpose of guaranteeing they will pay taxes on that fuel to the state which they operate in.
A Medicare surety bond is required of equipment suppliers and manufacturers as a guarantee that they will not attempt to engage in billing fraud with any medical institution. Collection agencies are required by some states to post bonds that will guarantee any funds collected are distributed appropriately to clients. A freight broker bond is a kind of licensing requirement imposed on a freight broker, which has the effect of guaranteeing the freight broker will pay all shippers and carriers in their networks as required.
States will generally require sellers of lottery tickets to purchase a lottery bond in order to guarantee the payment of taxes on those tickets to the state. Some states also require sellers of alcohol to purchase an alcohol bond, as a way of ensuring that taxes are paid on all sales of liquor. In a similar way, a cigarette tax bond is often imposed by states on businesses which sell cigarettes and other tobacco products, as a means of ensuring that taxes on those tobacco products are paid to the state.
One last type of financial guarantee surety bond is the Airlines Reporting Corporation (ARC) bond, which guarantees that customer payments received by travel agents will be properly forwarded to travel carriers.
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