Bonds are one of the most important parts of commerce today that not many people know about, particularly in the construction and real estate industries. Performance bonds are a type of bond used in the real estate construction industry to insure against catastrophic losses if a construction project that has been underway for some time can not be finished for some reason or another. The way a performance bond works is that a client for a construction project requires the deposition of a performance bond from contractors. The performance bond will be released back to the contractors upon the successful completion of the building to the standards of the client, but if the construction can not be finished for some reason, the client will be able to keep all or part of the performance bond in order to offset his own financial losses.
The most common reason for construction projects to fail to be completed is the bankruptcy of a contractor, which can happen due to construction delays, labor issues, or poor financial management. Another common use of performance bonds outside the real estate industry is for commodity contracts, where the seller of the commodity will post a performance bond that will be repaid upon successful and satisfactory delivery of the commodity. Most clients of construction projects will require performance bonds to be issued for all projects, and furthermore, federal and state governments have laws in place that mandate the use of performance bonds on all projects.
Since most contractors do not usually have the liquidity to put up the full amount of a performance bond when they begin a project, surety bond companies have arisen to fill this niche. What these companies do is that they will put up the full amount of the performance bond themselves, and allow the contractor to pay them back over time. Like any sort of loan, the surety bond company runs the risk of a contractor defaulting or going bankrupt, in which case they will take a loss and not be able to recoup the performance bond. Because of this, surety bond companies charge interest on the amount of the performance bond, which can range from 1% to 10%. The level of interest that will be assessed on the bond depends on several factors, which include the size of the bond, the length of the repayment period, and the credit history of the contractor.
What this means is that contractors with poor credit history can end up paying very high interest rates on performance bond sureties. There are, however, some surety bond companies that specialize in working with poor credit history clients, and they have acquired the knowledge and expertise over the years to know which clients are really a risk. As a result, they can give clients that are not really very risky better interest rates than most other companies will. One of the best of these companies is Bonds Express, which offers performance bonds at very low rates to many clients with poor credit.