A surety bond is a way of ensuring that a business completes the work it was hired to do. If it doesn’t, the bond’s guarantor is financially liable to the customer.
You may need a surety bond to meet requirements on government contracts if you run a construction company. Other businesses, like auto dealerships and liquor stores, also need surety bonds to comply with licensing and permitting laws.
Surety bonds are sometimes referred to as business bond insurance and can be purchased from business insurance companies.
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What is a surety bond?
A surety bond is a written agreement that guarantees a task or service will be completed as specified in the bond.
There are three parties involved in a surety bond are:
- Obligee: The party that requires a guarantee that work will be performed according to certain terms. This is usually the client.
- Principal: The business hired to perform work according to the terms of the bond. This is usually the contractor.
- Surety: The entity issuing the bond and guaranteeing that the principal will meet its obligations. This is usually an insurance company.
The surety is financially responsible to the obligee if the principal fails to meet their obligations.
🤓 Nerdy Tip
Surety bonds differ from fidelity bonds, which protect both companies and their customers against losses from theft or fraudulent activities committed by company employees. Fidelity bonds, which tend to be less expensive, are typically carried by businesses offering services in client's homes. These might include cleaning, moving, bookkeeping, child care or repairs. How do surety bonds work?
Here’s when you might need a surety bond:
- Your company is hired for a job. Say a local government agency hires your construction company to build a road. The agency wants a guarantee that work will be completed in a certain time frame and in accordance with local laws. In this example, the local government is the obligee and your company is the principal.
- You turn to an insurance company to buy a surety bond. The insurance company, or surety, writes an agreement or bond. It promises that the work will be done according to the terms spelled out in the bond. The surety’s role is to assure the government agency that you will complete the work as agreed.
- The surety compensates the obligee, if needed. If you don’t finish the project correctly, the insurance company will be financially responsible to the government agency. The surety then recoups its costs from your business.
What are surety bonds used for?
If you run a small business, a surety bond can help you compete for contracts with larger, more established players.
First, the surety has to confirm that your business is legit before it issues you a bond. That may include checking your credit profile, understanding your capacity to meet the project's obligations, and examining your company's reputation.
Second, a surety bond reduces the financial risk for your client. It acts as a guarantee that the obligee will recoup any losses if your company fails to finish the job.
Once a surety agrees to guarantee a business, the relationship can last a long time, over several future projects.
Types of surety bonds
Thousands of types of surety bonds exist, depending on the type of work involved or state or local laws. According to the National Association of Surety Bond Producers, a trade association, there are two main types of surety bonds: contract and commercial.
Contract bonds
Contract surety bonds are meant for construction projects, so they are also known as construction bonds. The obligee is the project owner and the principal is a contractor hired to carry out the project.
There are four subtypes of contract bonds:
- Bid bond: Covers the project owner if a contractor wins a project bid but does not end up signing a contract.
- Payment bond: Guarantees a project owner that a contractor will pay bills for labor and materials or to subcontractors and suppliers.
- Performance bond: Assures the project owner that if a contractor does not perform the work, the surety will find another contractor to ensure the project is completed according to the contract.
- Warranty or maintenance bond: Protects the project owner against any material defects or workmanship issues that may be found during the warranty period.
Commercial bonds
Commercial surety bonds are typically required by federal, state and local governments to make sure work is performed according to specific regulations.
For small-business owners, the most relevant types of commercial bonds are license and permit bonds. Government agencies require these as a condition for obtaining a license or permit. Auto dealers, plumbers, liquor store owners and mortgage brokers may need license and permit bonds.
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How to get a surety bond
Businesses can buy surety bonds from most construction business insurance companies, including:
- Nationwide was the largest writer of fidelity and surety bonds by premium value in the third quarter of 2025, the latest data available, according to the Surety and Fidelity Association of America .
- The Hartford has a dedicated bond division that can issue commercial as well as construction surety bonds.
- Travelers offers commercial, construction and court surety bonds, along with fidelity bonds.
You’ll need to find an independent insurance broker or agent near you to purchase a surety bond from these insurance companies.
The Small Business Administration also guarantees some types of surety bonds. This way, the SBA will reduce the risk for a surety company so that it can offer bonds to more small businesses. The SBA charges the business a small fee — 0.6% of the contract price — for performance and payment bond guarantees.
To find a list of authorized agents who work with the SBA to guarantee surety bonds, visit SBA.gov.
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- 1. Surety and Fidelity Association of America. Quarterly Countrywide Surety Top 100 Writers: Calendar Year 2025, 3rd Quarter. Accessed Apr 15, 2026.
