Financial guarantee surety bonds are a broad category of surety bonds used for the guarantee of a future payment or payments.
However, there are many types of financial guarantee surety bonds and in this article you'll learn:
- What a financial guarantee bond is
- The most common types of financial guarantee bonds
- Scenarios where it becomes impossible to get bonded
What is a Financial Guarantee Surety Bond?
Let's start by defining a surety bond.
A surety bond is a legal contract you purchase that acts as a guarantee you will do what you say you're going to do.
So a financial guarantee bond is a legal contract you purchase that acts as a guarantee you will pay money owed to another party at some future date.
In general, if you fail to pay the money owed, that third party can make a claim against your surety bond for financial compensation.
If the concept of a surety bond is completely new to you, read our post about what is a surety bond to get into the details. It's good to understand the bonding process if you have to purchase one.
Let's look at the most common types of financial guarantee bonds.
The Most Common Types of Financial Guarantee Bonds
Each of the following are examples of common financial guarantee surety bonds.
All of the following bonds are examples of bonds we can help you purchase.
We are Surety Bonds Direct, a specialized surety agency. It's our job to find you the lowest possible price and to make sure you understand the bond you need
1. Sales Tax Bond
A sales tax bond is probably the most common type of financial guarantee bond. It's required by a large number of businesses selling:
- Alcohol and tobacco products
- Lottery and gaming products
- Fuel and gasoline
- Even general retail products
The reason these businesses have to purchase this bond is because they collect sales tax at the point of purchase.
It's their responsibility to account for the correct sales tax figures owed to the state and pay the taxes on time or pay them with penalties by a specific date.
A very common sales tax bond is Texas mixed beverage sales tax bonds.
What Happens If The Business Fails To Pay The Collected Sales Tax?
If a business purposefully fails to pay any or all of the sales tax, the state can make a claim against the surety bond for financial compensation.
A sales tax bond is often required when a retail business gets caught failing to pay sales tax. Because of the offense, the state typically requires the business to purchase a sales tax bond and keep it active for at least a few years.
So a sales tax bond is a financial guarantee to pay collected sales tax money to the state, typically on a quarterly basis. This also includes paying for late penalties.
2. Wage and Welfare Surety Bond
A wage and welfare surety bond is purchased by a company that is hiring unionized workers.
Every union has a collective bargaining agreement. This agreement outlines for employers interested in hiring union workers:
- The minimum wages required
- Fringe benefits that must be guaranteed
- Hours worked per week and even day
- Vacation days
There are a multitude of other stipulations depending on the union.
The union that is providing the workers wants to make sure the collective bargaining agreement is honored by the employers.
So the union will require the employers to purchase a wage and welfare surety bond.
What Happens If The Union Agreement Is Broken?
If the employer purposefully fails to pay workers the correct wages or any other benefit outlined in the collective bargaining agreement, the union can make a claim against the surety bond for financial compensation.
So a wage and welfare bond is financial guarantee to pay for the services of the union workers being hired for a job.
3. Utility Surety Bond
A utility bond is purchased by a company that is about to consume a large amount of a utility like electricity, gas, or water.
A good example would be a business who is about to open a warehouse that might be running large machinery.
When they open, they would consume large amounts of electricity, racking up a very large bill.
The utility company wants to make sure the company will pay the bill, so they require them to purchase a utility bond.
What Happens If The Company Doesn't Pay The Utility Bill?
If the company purposefully fails to pay for the utility, the utility company can make a claim against the surety bond for financial compensation.
So a utility bond is a financial guarantee for the future payment of used utility services.
4. Lost Security Surety Bond
The last example we'll look at is a lost security surety bond. While considered a financial guarantee bond, it's a little different compared to the three we've covered to this point.
A lost security bond can include a large cashiers check or an old stock certificate that has been lost.
The owner of the lost cashiers check or stock certificate wants to get it replaced, so they'll go to the bank or company that issued the stock.
The bank is nervous about the lost cashiers check being deposited in the future (maybe 6 months or longer).
The company doesn't want to create and issue new shares of stock only to have the lost shares sold at some future date.
What Happens If The Cashiers Check is Deposited or the Sock Is Sold?
To prevent this type of potential fraud, the bank or company requires the person who lost the security to purchase a surety bond.
If the check is deposited or the stock sold, a claim will be made against the surety bond for the replacement of funds.
So a lost security surety bond is a financial guarantee for the payment in the event of fraudulently depositing a "lost" cashiers check or selling "lost" company stock.
3 Examples of When a Financial Guarantee Bond is Not The Right Solution
The following surety bonds are almost impossible to underwrite. And in most cases the bond is not the correct solution.
Again, we are a top surety bond broker. We have close relationships with the highest A-rated sureties. And a surety will only write a bond if it does not present too much risk. It's a balance.
The following two bond types are either not actual types of surety bonds or they are so risky, no surety will underwrite them.
Surety Bonds As Loan Collateral
We often get requests to purchase a surety bond to serve as collateral for a loan.
For example, a private loan. The business or individual providing the loan wants collateral to protect against the scenario where the borrower defaults on the loan.
While a surety bond is a guarantee of performance, a surety will not underwrite a surety bond to serve as collateral for a loan. There are too many unknown factors and the risk is too high.
If they were to even consider it, they would require collateral in the form of cash in a bank account they control. This defeats the purpose altogether.
This is not only for private loans, but small financial institutions may recommend a surety bond as collateral for a loan. In these cases, the financial institution does not understand surety bonds enough.
You will have to come up with another solution.
Surety Bonds When Purchasing Large Amounts of Product
We have received many requests to purchase a surety bond to be used as collateral for the purchase of large amounts of product from overseas.
Sureties will not underwrite a surety bond with a foreign company as the obligee. In fact, anytime you're dealing with a foreign company, it will be impossible to have a surety bond underwritten, at least without 100% collateral for the bond.
Financial Guarantee Surety Bond Recap
A financial guarantee bond is a legal contract that guarantees you'll pay a specific sum of money to a third part in the future.
There are many types of financial guarantee bonds, the most common being:
- Sales tax surety bonds
- Wage and welfare bonds
- Utility bonds
- Lost instrument or lost security bonds
If you need one of these bonds, we can help you get pricing and have your bond issued within 1 to 2 business days.
The following surety bonds used as financial guarantee are impossible to fulfill:
- Surety bonds used a collateral for a loan
- Surety bonds used as collateral the order or large amounts of product
- Surety bonds with a foreign company as the obligee (the party requiring the bond)
Of course if you have any questions or you don't know if the bond you need can be fulfilled, you have two options:
One, complete a quote request and tell us about the bond you need. We will contact you back within one business day.
Two, call a bond specialist today at 1-800-608-9950 and speak with a real surety bond specialist.
