Managing Surety Bonds: A Risk Manager’s Role?

Oct 0, 2021

When it comes to the responsibilities of risk managers for certain industries, surety bonds play a considerable role in how they help protect a company's money. They provide the same essential services as insurance policies in their own unique way. Understanding how they work and their benefits can help protect you from broken contracts and the negative ramifications of not fulfilling company contracts for others.

What Are Surety Bonds?

Instead of simply another insurance policy, a surety bond is a promise or contract handled by a third party to facilitate contract coverage between two others. In a way, they operate a bit like escrow. However, instead of focusing on finances specifically, they oversee the completion of contractual obligations. One entity, the principal, fulfills the terms of the contract. Another, the obligee, receives the benefits of that work. The surety bond holder makes sure they both fulfill the terms. They are guarantees, defined after careful investigation of the and simple, that everything will go as planned.

Risk Managers Role in the Surety Bonds Process

Either third-party surety companies or dedicated risk managers handle the surety bonds between contracted entities. These mutually beneficial risk management tools put another service in the hands of risk managers who want to expand their role and improve outcomes for their clients. Risk managers use the collection and analysis of data to assess plans and practices in a company or other organization. Surety bonds provide another avenue for this essential task.

Historically, surety bonds have minimized risks for construction companies that engage in all types of contracts. Insurance policies cover a large part of the financial aspect. Surety bonds handle the actual terms of the contract. Risk managers step in with their own mental abilities, smart software programs, and careful data collection and analysis techniques to assess contractors before a business engages their services. The use of surety bonds helps cement the contract terms and minimizes risk overall for everyone involved. Smart risk management specialists would be remiss in adding surety bonds to their repertoire.

Benefits of Surety Bonds Over Bank Letters of Credit

The two major advantages of using surety bonds instead of letters of credit include lack of collateral and increased liquidity. A company that chooses the latter must tie up some of their assets for the entire credit amount and length of time. This negatively affects their ability to continue business as before or engage in growth activities.

On the other hand, surety bonds do not interfere with the ability to get or use additional credit. No collateral is necessary, there is no bank or other entity to take a security interest, and the surety bond cannot be canceled or reclaimed without a full investigation.

Best Ways to Manage Surety Bonds With Minimal Risk

While individual surety companies do a lot of the legwork for prequalifying the contractor and managing the entire process, risk managers can cover much of the same things. As they are job is to minimize the possibility of lost money, time, and, in some cases, reputation, they surely use surety bonds to help. In today's digital world, it makes sense to use software specifically designed to handle this type of information. No matter what type of business is involved, choosing a powerful, smart, and comprehensive option virtually automates the risk management process.

Take the difficulty out of tracking surety bonds when you use the Flisk platform. With complete, secure, and instant information viewing and analysis, risk managers and the whole team enjoy comprehensive access to the information and features they need.

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