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Overview of Financial Guarantee Bonds

Rather than being a specific type of bond, this is an umbrella term for all types of bonds that are put in place to guarantee the payment of taxes, fees, penalties, leases or other financial obligations a bonded party has to а bond obligee.

Such bonds are typically required of businesses that conduct sales of, for example, fuel, alcohol or lottery tickets, but also of such that make transactions or payments such as medical equipment providers who work with Medicare or freight brokers.

All financial guarantee bonds are conditioned upon the payment of such financial obligations, and offer protection to the bond obligees - the state and the public - in cases in which those required to make payments default on their obligation. In such an instance, the surety provides compensation for any damages or losses that arise due to such default. Compensation can be as high as the full bond amount, also known as the penal sum.

For a detailed explanation of how surety bonds work and why they are needed, see our ‘What is a surety bond’ guide!

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The sections below explain the difference between this type of bonds and other types, provide you with examples of popular financial guarantee bonds, as well as explain bond cost and bond claims.

For more information about a particular bond, call our bond professionals at (866)-450-3412!

The following are some of the most popular bonds of this kind:

Alcohol bond

This type of bond is required of sellers of alcohol in a number of states to guarantee their payment of taxes on transactions involving liquor.

ARC bond

The Airlines Reporting Corporation Bond guarantees that travel agents will forward payments they receive from customers to carriers.

Cigarette tax bond

Often required by a state’s Alcohol and Tobacco Division, this bond guarantees the payment of taxes for the sale of cigarettes and tobacco.

Collection agency bond

This bond guarantees that funds collected by a collection agency are properly distributed.

Freight broker bond

This bond is a licensing requirement for freight brokers across the country and guarantees that they will make all necessary payments to the carriers and shippers they work with.

Fuel tax bond

Businesses who sell, mix or distribute fuel are required to post such a bond to guarantee they will pay taxes to the state they deal in.

Lottery bond

Sellers of lottery tickets or businesses who have a lottery machine may need such a bond to guarantee their payment of taxes on sales of tickets to the state, among other things.

Medicare surety bond

Also known as the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies Bond (DMEPOS), this bond is required of manufacturers and suppliers of such equipment to guarantee they will not engage in medical billing fraud.

Difference with Other Types of Bonds

Strictly speaking, the difference between this type of bonds and indemnity bonds is that the latter are conditioned upon the execution of non-financial obligations, instead of on an obligation to make a payment or transaction. Such non-financial obligations could be a contractor’s performance on a contract or an auto dealer’s obligation to do business honestly - they do not involve a financial transaction as the basis for the bond agreement.

With regards to the effect and functioning of surety bonds, this distinction does not make a big difference because both types of bonds are agreements to comply with certain requirements and regulations. That said, different bonds may be conditioned differently or may be subject to further legal limitations - such as a certain time-frame within which a claim can be filed against a bond in case of a violation.

Cost of Your Bond

The cost of your bond is a fraction of the full bond amount. The amount for the different types of financial guarantee bonds differs from bond type to bond type though some, such as the freight broker bond ($75,000), have fixed amounts.

Your bond cost, or premium, is determined by the surety when you apply for the bond, and is based on your credit score, as well as your financial statements, liquidity, assets, and work experience. Applicants with high credit scores can typically expect a rate between 1% and 5% of the total bond amount.

To get a free and precise quote on the bond you want, submit a surety bond application and we will provide you with a quote.

Claims Against Your Bond

Generally, this type of bond is conditioned upon the fulfilment of some kind of financial obligation of the bonded party. How this obligation is defined will vary from state to state, as well as from bond to bond.

A claim against a bond can be filed when the bonded party fails to fulfil their obligations. In such an instance, once a claim is filed, the surety backing the bond will need to repay claimants up to the full amount of the bond. In return, the bonded party must repay the surety for any compensation it extends.

If you have any questions about a certain bond or the bonding requirements in a particular state, call us at (866)-450-3412 anytime!

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