Surety bonds explained: How businesses use them to support growth and preserve capital

Surety bonds for businesses are commonly associated with insurance, but they operate very differently. For many organizations, the need for a surety bond arises at a critical moment. It may be required when bidding on projects, meeting regulatory obligations, or moving forward with a contract. Without it, opportunities may be delayed or lost entirely.

While often viewed as a compliance requirement, surety bonds play a broader role in how businesses pursue opportunities and manage financial commitments. Rather than transferring risk, they function as a form of credit that enables organizations to meet obligations while preserving access to capital.

For organizations that rely on bonding, this distinction is not just technical. It directly influences how they manage liquidity, qualify for work, and structure their financial strategy.

What is a surety bond?

A surety bond is a legally binding agreement that guarantees a business will fulfill a financial or performance obligation. Each bond involves three parties:

• Principal: Individual or business responsible for providing the product or service.
• Obligee: The party requiring the bond.
• Surety: The party that provides the financial guarantee that the obligation will be completed based on the terms of the contract.

If the principal fails to perform, the surety may step in to resolve the issue. Unlike insurance, however, the expectation is that the principal will ultimately reimburse the surety for any losses incurred. This distinction is important. Surety does not transfer risk in the same way as insurance. Instead, it extends credit based on financial strength and operational performance.

Where surety bonds are used

Surety bonds are commonly required in situations where performance or financial obligations must be guaranteed. Public construction projects are a primary example. Contracts funded by taxpayer dollars typically require bonding to ensure that projects are completed without additional public cost if a contractor defaults.

Surety requirements also extend beyond construction. Businesses may need bonds to obtain licenses, comply with regulatory requirements, support employee benefit plans, or secure lease and utility obligations. In many cases, bonds are a prerequisite for moving forward. Without bonding capacity, businesses may be unable to bid on projects, meet regulatory requirements, or complete time-sensitive transactions, helping manage financial exposure and contractual risk.

Surety bonding as a form of credit

Surety underwriting is grounded in evaluating a company’s financial strength, experience, and ability to perform over time as part of a credit-based model. The balance sheet plays a central role. Sureties look closely at retained earnings, working capital, debt levels, and overall financial stability, as these factors demonstrate a business’s ability to fulfill its long-term obligations.

This approach differs from traditional insurance, where premiums are based on expected losses. In surety, the expectation is that obligations will be met, and losses will be recoverable in the event of a default. As a result, bonding capacity is directly tied to the financial health of the business, influencing how much work a company can manage profitably.

Surety bonds are underwritten with the expectation of minimal losses. When a loss does occur, the probable maximum loss is 40% for a single loss¹. In recent market conditions, loss ratios have typically remained in the 20%-25% range, with results trending closer to 20%².

Financial discipline is not just a requirement for approval. It directly determines how much work a company can take on and how quickly it can grow. Organizations that consistently reinvest in their business and maintain strong balance sheets are often better positioned to expand their bonding capacity over time despite economic challenges.

Surety bonds vs. letters of credit

Surety bonds are often used as an alternative to letters of credit, particularly when financial guarantees are required. Letters of credit can take several weeks to process and may require cash collateral or reduce available borrowing capacity. This can limit financial flexibility, particularly for businesses managing multiple projects or competing capital needs.

Surety bonds often provide a more efficient and flexible alternative. In many cases, approvals can be completed within days once financial information is provided and reviewed by the surety. In addition, bonds may allow businesses to preserve liquidity by avoiding the need to pledge cash or carve out the letter of credit from their line of credit, helping support broader liquidity management strategies.

For businesses focused on growth, this distinction is not incremental. Preserving access to capital and managing liquidity can directly affect how many projects a company can manage effectively, how quickly it can respond to opportunities, and how efficiently it can deploy its balance sheet.

Why the contract matters

In many cases, particularly in construction, the bond is directly tied to the underlying contract. This relationship is often described as the bond following the contract. The bond guarantees the obligations defined in the agreement, including project completion and payment to subcontractors and suppliers.

If the principal fails to meet these obligations, the surety may step in to complete the work or otherwise resolve the issue. This structure helps ensure that projects are delivered as agreed and protects all parties involved.

Huntington Insurance’s approach to surety bonds

Surety bonds are widely used, but the approach to structuring and managing bonding programs can vary. Huntington Insurance focuses on helping clients develop bonding strategies that align with their financial position and long-term goals. With access to more than 30 surety carriers, the team evaluates each client’s situation and identifies appropriate solutions based on industry, experience, and financial profile.

Huntington also supports clients throughout the underwriting process. Clear communication of financial performance and operational capabilities can significantly influence how underwriters assess risk and determine capacity. Acting as an advocate in this process can help businesses secure more favorable outcomes.

Partnering for a stronger bonding strategy

Navigating today’s surety requirements requires expertise, clarity, and a long-term strategic perspective. Huntington Insurance partners with businesses to design bonding programs that align with financial goals, support growth, and preserve access to capital.

Ready to strengthen your bonding strategy? Contact Huntington Insurance to get started.