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Supply Bonds

Supply bonds are a type of contract bond that provide a guarantee that a supplier will deliver the promised materials. A supply bond does not cover any labor costs and is simply used to ensure that the required materials are delivered according to the terms of the contract. This piece will cover everything suppliers (or people who purchase supplies) need to know about supply bonds.

What is a Supply Bond?

A supply bond is a guarantee that a supplier will deliver the materials outlined in a contract. If the supplier fails to deliver the goods, then the bond provider will be required to pay for the cost of the missing materials. Supply bonds give financial protection to the purchaser of the materials, ensuring that they either receive the goods or receive financial reimbursement if the goods aren't delivered within the time and quality constraints defined in the contract. Supply contract bonds can be required by state or federal law for some projects.

What is the Purpose of Supply Bonds?

Supply bonds create a financial incentive for suppliers to deliver the goods they agreed to by holding them liable when they do not. Without the protection of the bond, purchasers may not have another way to hold a supplier accountable for missing or defective goods, at least not without going through the inefficient court system. Bonds streamline the process for all involved and guarantee justice (in the form of payment) for anyone negatively affected by a supplier. For that reason, many purchasers will preemptively protect their interests by requiring a supplier to obtain a bond.

How does a Supply Bond work?

If a shipment of supplies doesn't arrive on time, in full, up to the required standards for quality, or sufficient according to some other previously-established expectation, the purchaser may file a claim for damages.

Even though the supplier is liable for those damages, that party may be unwilling or unable to pay. Since the surety company that issues the bond guarantees payment for valid claims, it ensures that purchasers don't take a financial loss because of the mistakes of their suppliers. Similarly, by forcing suppliers to pay the surety back for any claims it settles, supply bonds force the bonded contractor to be accountable for their actions, which then deters bad behavior. Overall, supply bonds, like all types of surety bonds, work to create trust between parties in the bond agreement and facilitate robust business activity as a result.

When a surety receives a claim against the supply bond from an aggrieved purchaser, they first investigate it thoroughly. Payment is only guaranteed for valid claims, and false claims aren't unheard of. Provided that everything checks out as claimed, the surety immediately settles the claim in full. Then, the surety shifts its attention to the supplier, who is liable for any and all claims under the terms of the bond agreement. Suppliers who cause claims that lead to settlements must reimburse the surety for the entire amount of the settlement plus interest and fees.

What parties are involved with a Supply Bond?

A supply contract bond needs three parties:

  • The surety will underwrite the surety bond. The surety guarantees payment to the obligee and holds the principal accountable for that debt.
  • The obligee requires that a bond is purchased. The obligee may create the bond requirements and file claims against the bond if contracted supply obligations aren't met.
  • The principal is the supplier of the materials. The principal will obtain a bond from the surety and accept liability for any claims filed against it by the obligee.

Who should get a Supply Bond?

You should acquire a supply bond if it's required to do so to complete a purchase order. Supply surety bonds aren't necessary in all cases, particularly with smaller orders. But they're certainly not uncommon either. Suppliers that need them once typically need them frequently because they work with similar kinds of purchasers, so it's valuable to have a consistent bond partner to work with. It's also important to move quickly to secure a bond as soon as the requirement presents itself to avoid unnecessary obstacles to commerce. Make the bonding process easy while still treating it seriously with the help of Viking Bond Service – a national surety agency with all the resources you require.

Who Creates Supply Bond Requirements?

The obligee – the party purchasing materials from the supplier – creates the supply bond requirements. Specifically, they determine how large the supply bond must be, meaning the maximum amount the surety bond provider agrees to pay in claims settlements. In most cases, the required amount matches the contract amount which correlates to the value of the supplies being purchased.

How are Supply Bonds Obtained?

To obtain a supply bond, you'll need to submit an application to a surety agency. You'll also need to include additional supporting documentation that helps the bonding company gauge the financial stability of your business. You'll be provided with a list of the documents that you'll need to submit. These usually include business financial statements, proof of insurance, a business resume, and a credit review – other business partners may also need to provide this information. You'll then be provided with a quote for the cost of the bond. Once you've signed all of the necessary paperwork and submitted your payment, you'll be provided with the supply bond.

How much do Supply Bonds Cost?

The cost of a supply contract bond is not fixed; neither is the bond amount which will be based on the value of the supplies the supplier is under contract to deliver. A surety bond company will use the information you provide in your application to determine what they think is the appropriate bond premium. Bond costs are lower if your business is considered low risk; in other words, the bonding company does not expect to have to pay out on a claim against your bond. Your risk factor is calculated using the financial strength and credit history of your business and your personal credit score.

Can You Get a Supply Bond With Bad Credit?

That depends on two factors – first, your credit score and financial history. A score below 700 or something like a past bankruptcy will make bonds more expensive and limit the number of surety agencies willing to offer bonds. Second, the bond partner you choose. Different agencies hold applicants to different standards, meaning some deny a bond to anyone with bad credit and others don't. Viking Bond Service falls into the second category. As part of our commitment to the suppliers we bond and serve, we don't hold bad credit against bond applicants. Instead, we do everything possible to get these applicants quickly approved for a bond at a fair and affordable rate. We have become so good at getting bonds for people with bad credit that we created a special program to expedite the process. We encourage anyone and everyone to take advantage of our bad credit bond program.

How are claims handled for Supply Bonds?

When the obligee files a claim with the surety company, the surety guarantees payment in full up to the amount of the bond. Before paying, however, the surety will conduct an investigation into the details of the claim. In some instances, it's straightforward to establish that supplies didn't arrive as the purchaser intended. But there are also instances where outcomes are less clear, and there's serious contention between the principal and obligee. That's why the surety investigates. They may enlist professional investigators, lawyers, or any other specialist necessary to make a definitive ruling on the merits of a claim. As long as everything holds up, the obligee always receives payment from the surety. The final step of the claim is for the principal to pay the surety back, with interest added to the debt along with the cost of the investigation and any other fees.

How to Manage Supply Bond Costs

Suppliers that need a supply bond once, typically need one countless times throughout their career. Many, most, or all the orders they fulfill may require them to get a bond before completing the purchase contract. When bonds play such an important and ongoing role in how a business operates, it's important to think about those costs long term – both how bond costs accumulate over time and how to keep those costs in check. Here's some sound advice:

  • Pick the Right Surety Agency – Two different surety agencies may quote drastically different premium prices for the same supply bond. Look for an agency with fair and competitive prices, even for people with challenged credit. Don't base the entire decision on price, though. Factor in service as well, because it's important to have a bond provider that's eager to provide information and assistance at all times.
  • Avoid Claims – Claims cost much more than supply bond premiums, especially with interest and fees included, so it's important to avoid them by whatever means necessary. Claims can also result in loss of bond coverage, which can make it harder to obtain another bond and harder to obtain customers. Claims can have serious and lasting financial consequences beyond the bond itself. That's why successful businesses put policies and processes in place to ensure claims don't occur.
  • Improve Credit Standing – Underwriters base bond costs on the applicant's credit standing more than anything else. Improving credit scores and removing blemishes from one's financial record leads to lower bond costs. For suppliers who need lots of bonds, these savings can be significant.

Why Should You Get a Supply Bond From Viking Bond Service?

Don't let bonding become a burden on your business. Turn it into an asset instead. Viking Bond Service can make it quick, easy, and affordable to obtain a supply surety bond. And with the aid of a bond from a trusted provider like us, you can attract a lot more customers and close more deals with confidence. We serve all 50 states, and we issue hundreds of other types of surety bonds in addition to supply bonds. Suppliers can find all the bonds they need delivered by a team that cares about service, support, and satisfaction. No wonder so many suppliers across the country make us their preferred bond partner.

Get a Supply Bond Quote Today!

Don't wait to get the supply bond you need to wrap up a deal. Speak to one of our bond experts by calling 1-888-2-SURETY (1-888-278-7389), or submit your questions through the form on this page. You can also request a quote for a supply bond at any time.

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