Some people are under the impression that a “bond” is just what its name implies. While this is true to some degree, all types of bonds have features that make them unique. Not only are bonds unique but the underwriting process as well. However, not all bonds utilize a unique underwriting process. In fact, most Canadian underwriters utilize the same bond application processes. Below, you will discover more information about bonds, the differences and similarities in the cash and surety bonds, and the application process utilized by most underwriters in Canada.
Bond: What Is It?
Before you can understand the differences and similarities in the cash and surety bonds, you must know the definition of a “bond”. All bonds are “financial instruments” that are utilized in a variety of industries. These tools are more commonly utilized in the construction industry. But, they are utilized by contractors that provide public services, such as residential house cleaning, carpet cleaning, HVAC, commercial painting, and children/pet daycare. Bonds are also utilized in the criminal justice industry by bail bond companies.
Bonds are also considered a “written guarantee”. Before bonds, companies relied on “written guarantees”, which are not half as reliable as when it is documented on paper. The bond is a written promise that the service provider will fulfill his/her obligations per the Terms of Agreement in the contractual agreement.
Do Bonds Require Collateral?
To protect their investments, underwriters most often require applicants to provide some type of “collateral”. The term “collateral” is defined as a type of security. Collateral is most often utilized in the financial industry. Banks, credit unions, and other financial institutions require their customers to provide collateral when obtaining loans.
Collateral can be in the form of cash and valuable assets, such as vehicles, properties, machinery, equipment, and electronics. When the applicant does not have enough collateral to cover the bond, a surety company can act on their behalf. In this case, the surety company will provide the collateral instead of the applicant.
What You Need To Know About Surety And Cash Bonds
Cash bonds and surety bonds share some similarities and differences. One of the main differences in these two bonds is the number of involved parties. Surety bonds in Canada involve three parties – the principal, obligee, and surety. The principal is the individual who is responsible for posting the bond, the obligee is the person, organization, or entity that requires the principal to post the bond, and the surety is the underwriter or surety company, acting on behalf of the principal.
The parties involved in a cash bond is the principal and surety. The principal is the individual who needs to post the bond and the surety is the underwriter or surety company acting on behalf of the principal. An obligee is not required in a cash bond contract because the principal is not providing a service but only needing to raise funding for a project.
The surety does not always need to be a financial institution, surety company, or underwriter. It can be anyone or company that is putting up the cash or collateral on behalf of the principal. In most cases, the surety will charge the principal a fee based on the amount of the loan. If the cash bond is going to be utilized as a bail for a criminal defendant, the fee charged should not exceed 10% of the defendant’s bail.
When the principal pays the loan in full, along with the fees, the surety will generally refund the principal portion of the fee monies. This is also the case when the cash bond is utilized as a bail bond. In this case, the criminal defendant will be refunded a portion of the fees he/she paid to the bail bonds company.
The Main Advantage Of Cash Bonds
For the biggest part, cash bonds are relatively simple and easy to understand. First, you need to understand cash bonds can be used in a number of situations. That being said, cash bonds are usually used in the jail industry. For instance, when someone gets sent to jail and doesn’t have the money to get out this is where cash bonds will come in handy. The defendant will simply put up the required amount of money and he or she will get released from jail pending trial. This gives the individual the potential to keep working and living their day-to-day life while the case goes on. Another great thing about this type of bond is that the individual that took out the bond will receive the majority of the money back when the entire situation is settled.
Another really great thing about cash bonds is that there is no need to apply or qualify. You do not have to fill out lengthy documentation and you do not have to wait to get approved. All you have to do is find a suitable cash bonding company. Just keep in mind that not every company will issue you a bond. There are some cash bonding companies out there that might not be willing to issue you a bond, but this is extremely rare in Canada, especially when it comes to ProfessionalsCoverage. We are here for everyone in just about every situation.
The Main Disadvantages Of Cash Bonds
You don’t need to be an insurance expert to clearly see that cash bonds come along with a vast majority of benefits. However, this does not mean that they don’t come without some disadvantages as well. And, that they certainly do. The first and probably most obvious disadvantage is that you are going to need a lot of money upfront for these bonds. What are you going to do if you are sitting in jail and don’t have the money to get out? Not getting out could not only potentially mean your reputation, but it could mean that you might lose your job. This would only make your entire financial situation even worse.
What’s even more troubling is that there are many situations when the defendant goes through the entire bonding process, follows the rules, shows up in court, and doesn’t even get refunded the entire amount of the cash bond. In fact, there are some provinces in Canada where the court system will liquidate money owed to the government from the bail. This could literally include anything from back child support to back taxes, or even unpaid court fees. Whatever the situation is, you don’t want to lose more money when you are already out a couple of thousand or hundred in bail money.
The Main Advantages Of Surety Bonds
If you are going to do business in Canada, you are going to without a doubt want a surety bond. This is especially true if you are in the construction industry. Of course, there are all kinds of bonds available for different situations, but it seems like they are mostly associated with the construction industry and yes, these surety bonds do expire. For instance, if want your estate run by a specific individual after your death, you will need a probate bond to legally do so. There are also what are known as bail bonds. These types of bonds are used when you need to be bailed out of jail and don’t have the cash on hand.
When these bonds are issued, you are basically saying that you will, by all means, show up for court as well as adhere to your parolee conditions, if any are issued. Whatever the situation is, you can see that bonds come backed with a variety of benefits. You can see the obvious benefits for the beneficiary and jail industry, but how do Canadian construction businesses benefit from bonds?
To start off, the biggest and most obvious benefit of a surety bond in the construction industry is that it can help avoid penalties. For instance, in Canada, there are several industries where surety bonds are required to do business. Doing business without one of these bonds could not only potentially result in hefty fines and fees, but if the situation is severe enough it could result in major jail time. Another huge advantage is that it gives your customers confidence in your company.
Just the fact that you are willing to go and get this bond proves that you are a proverbial man of your word. Many Canadian customers these days are concerned about the companies that they are doing business with and they should be because there are just so many scammers out there. A surety bond will let your customers know that you are an actual company with actual licenses and insurance policies. Pretty much, if something goes wrong on the job, the performance bond and or labour and material bond is going to make sure that you are held responsible for whatever goes wrong. Not only this, but it eliminates unqualified competition.
The Main Disadvantages Of Surety Bonds
There is simply no disputing the fact that surety bonds are great. Not only can they protect you in a variety of situations, but they can ensure that you are getting work in the first place. All that aside, it is important to remember that surety bonds are like everything else out there, they have two sides. And, the two sides would be the good side and the bad side. However, when it comes to surety bonds the good far outweighs the bad. That being said, the downside to surety bonds is that they are not automatically granted to just anyone who asks.
Instead, most individuals and even most companies will be required to apply for the bond. And, once you apply there is simply no guarantee that you are going to be approved. The insuring company will weight the potential risks and returns before deciding to issue the bond or not. There are some key factors that insuring companies will look at your previous work history, finances, and your previous claims history. It probably goes without saying that if your finances are bad and you have a high claims record then your chances of acquiring the bonds are far less likely when compared to those with a spotless record.
However, just because you do not qualify with one company or are considered a high-risk it doesn’t necessarily mean that you can’t get bonded at all. In fact, there are specific companies out there that are designed to handle high-risk cases. Once again, this will come with a major downside, and that downside will be financial. Getting approved in a high-risk situation will mean that there are going to be higher fees associated.
Alternatives To Surety Bonds
Ultimately, there are several alternatives to surety bonds. Nevertheless, they may not be worth it. For instance, you might be able to use your company’s capital. You can make the guarantee by posting cash. This might be a good option for wealth companies but it is not a good idea for most Canadian businesses. Posting the guarantee in cash means that your money is going to be put a risk. If a claim is filed against your company and you lose, your company is going to lose that money. This is a major risk and it could result in your company closing its doors a short time later.
This is a risk that many Canadian businesses are not willing to take. That is why you’ll want to rely on surety bonds. They’ll ensure that you’re able to solve this issue and protect your business to the fullest. By utilizing surety bonds, you’ll save money, put the client’s mind at ease, and fulfill your initial duty. Remember that it is pertinent to fulfill your obligations or you’re going to run into problems regardless of the technique you use.
Avoiding Claims
Once you’ve acquired a surety bond, it is your duty to live up to your end of the bargain. Failing to do so will result in a claim being filed against your bond. You may be able that you can avoid this problem. However, you never know what your clients are going to do. Even if you do your best, something could go wrong and that could result in problems with the client in question. Therefore, this could lead to the disgruntled client filing a claim against your bond. Still, there are some things you can do to decrease your risks.
For starters, you’ll want to learn more about your responsibilities. What does the claim say? What are your requirements? Once you’ve found out, you should do everything in your power to fulfill your responsibilities. This is the best and easiest way to avoid claims. Simultaneously, you should communicate with the client. The key to solving problems is to ensure that you’re aware of those problems as soon as possible. Keep in touch with the client so you can identify and address problems immediately.
Canadian companies with excellent communication will be able to avoid bond claims better than others.
Still Have Questions And Concerns?
We have covered a lot about surety and cash bonds. You can already see from the information above the whole area is confusing and complex. Heck, it really does take an expert to know and understand all the laws and regulations involved with the bonding process. And, this is exactly why we are here for you. At ProfessionalsCoverage, we have trained and qualified agents standing by ready to assist. Whether you are looking to apply for a bond or you just have additional questions, all you have to do is reach out and get in touch with us. Hit up our website or pick up the phone and give us a call via our toll-free number. We are here and more than willing to assist in any way that we can.
If you would like to learn more or speak to a broker or agent regarding your bonding needs, you can contact us or request a quote.
