An important question to ask in getting into a commercial business is the importance of surety bonds. What is a surety bond and what is its importance? In a nutshell, a surety bond is a legal document that states that the principal will pay a specific amount if the promised results are not achieved or if the principal is negligent. This is an important consideration for anyone who wants to enter into a business because failure to pay will lead to penalties and litigation which are very costly.
First, one must understand the difference between a bonding agency and a surety bond company. A bonding agency is the one who contacts potential investors or customers and asks them to sign a document stating that the principal will be financially capable to pay for the promised results. This is often done by putting the name of the principal on the title page of the agreement and by attaching a letter from the principal that says that he or she is experiencing financial problems and cannot continue as the issuer of the bond.
Surety bond companies provide a surety bond only if the principal has enough money to cover the cost of the penalty. This is where the difference between the two comes into play. Surety bonds are the ones that contain a clause that says that the company will be liable for any penalties. While the penalties are usually spelled out in the fine print of the contract, most companies understand that they have a lot of leeway in interpreting what it means. The surety bond companies are the ones that take care of the legal aspects while the principal is away from the scene.
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