If you're starting out in a new business, you're going to need a type of coverage called a surety bond. Since you are the one needing the bond, you're called the (1) 'principal.' You're going to buy the bond from a (2) 'surety company.' If you're involved in a roofing business, for instance, each person that hires you to install a roof wants to be certain that if the contractor fails to do the stated work, the money they put down for the work isn't lost and they'll get it back. First of all, if a person can't show proof that he/she carries a surety bond, that's a definite warning not to do business with them.
Every type of surety bond ensures that the job slated to be performed will be completed, with the bond backing up that statement. Once a bond is paid for, a statement has been made to the person you're going to do the work for, that you won't stop work until the job is completed with top notch work. Otherwise, your customer can collect from your surety bond and you'll have to pay the money back to the surety bond company. Whether they are bid bonds, performance bonds, license bonds or other type bonds, they all work on the same order and protect the client, who is also the (3) 'obligee' from fraud. As you can see there are three main parts to a surety bond.
If road work is going to be needed in a municipality, contractors will bid on the project and the contractor with the lowest bid will win the contract. The work must be excellent work just as the higher bidder contractors would have done. Now, something called bid bonds are needed to make sure the bid you stated is correct. Once your company has won the bid to do a certain job, performance bonds are required that ensure what has been stated will be done correctly. Many jobs are sub-contracted out to different suppliers or other contractors. How do they make sure they'll be paid and be able to pay their employees while they're completing their section of the job? The types of bonds that ensure sub-contractors will be paid are payment bonds.
In this day and age, no one fully knows what another person or company is thinking. It used to be that a verbal agreement was enough between each person because they stood on their word. Just looking around at the mass production of malls, tracts of homes and sky scrapers being built by famous contractors who have many sub-contractors working along side them can give you an idea of why surety bonds are so important. Anyone dealing with an automobile dealership, mortgage or real estate broker, contractors, investment or insurance firms can see why a surety bond is needed. They can be purchased online from good companies for a small percentage of the actual monetary amount of the bond.