Bonds are used for various reasons in business. From raising money to ensuring the completion of work, they’re utilised across a range of industries to achieve different objectives.
With many types available, you may be curious about how they differ.
Two types of bonds that are often compared are surety and performance bonds. Here, we unpack the main differences between a surety bond and a performance bond.
Surety bonds are used to guarantee that a business fulfils its obligations. While a contract itself outlines an agreed scope of work between two parties, there is no guarantee that this will actually happen.
With a surety bond, there are three parties involved. This usually consists of the surety provider (an insurer, like Allianz Trade), the business receiving the work, and the contractor.
If the contractor delivering the work were to go bankrupt, a surety bond would ensure that the receiving business is insured and gets paid back, allowing them to seek out another contractor to complete the obligations.
Read more: What is a surety bond?
A performance bond is a type of surety bond focused on both the completion of a project and the customer’s satisfaction levels upon said completion. Performance bonds are sometimes referred to as performance guarantees and are frequently used in the construction industry.
For example, if a contractor failed to meet the completion date, a performance bond would cover the customer in their efforts to source an alternative provider to finish the work.
Performance bonds can also be written to ensure that work is not just completed but done to an agreed standard.
Read more: What are performance bonds?
While a surety bond ensures that obligations are met, a performance bond focuses on the quality of the completed work. Ultimately, the differences fall under the following categories:
Since it has a less specific focus, a surety bond can provide protection over various aspects, including protection from a lack of payment. With a performance bond, however, the protection is bound to the quality of the work completed, or just the completion itself.
While surety bonds can have multiple grounds to claim depending on the obligation, a performance bond will mainly (or only) have its claims process triggered by sub-standard performance (or lack thereof). Thus, a performance bond applies more pressure on the contractor to meet their promises.
Surety bonds are used across a range of different industries and settings. Performance bonds, by contrast, are more specific and often used for large-scale, time-consuming projects, such as construction.
While bonds serve a similar purpose to ensure completion of work, depending on the context, certain types of surety bonds may be more suited than others. Surety bonds can be broken down into three categories:
Contract bonds offer protection to the customer and are used to ensure that the terms of a contract are fulfilled. A performance bond is a type of contract bond.
Commercial bonds are used to ensure that businesses comply with legal or regulatory requirements, often as instructed by regulatory bodies and government authorities.
Commonly used in legal settings, a court bond ensures that a party fulfils their legal obligations, such as appearing in court.
The choice between a more generalised surety bond or a specific performance bond will greatly depend on the project you’re undertaking. Overall, surety bonds are a useful way of improving a contractor’s credibility and can be used not only to provide peace of mind to a customer, but also help contractors win more work.
If you’re not sure which bond type is best for you, we can help. Allianz Trade is a trusted insurer, covering over 60,000 customers across the world. We’re a UK leader in surety bonds and have an established track record of helping businesses like yours use bonds to support your business growth.
You can more about our surety bond offering by visiting our surety bond page. For a personalised response, contact our expert team.
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
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