UNDERSTANDING THE DIFFERENCE BETWEEN A CASH AND SURETY BOND

INTRODUCTION

When a person or company needs to provide financial security for a project or obligation, they can choose between a cash bond and a surety bond. Each type of bond has its own benefits and drawbacks. The choice depends on factors like available funds and the specific requirements of the project. This website can help guide you through the decision-making process and provide more information on the options available.

WHAT IS A SURETY BOND?

Three parties enter into an arrangement known as a surety bond:

• The Principal – The person or company responsible for fulfilling the obligation.
• The Surety Company – The organization that guarantees the payment or completion of the task.
• The Obligee – The entity that requires the bond to ensure the work gets done.

In a surety bond, the surety company promises to cover financial losses if the principal fails to meet their responsibility. Instead of paying the full bond amount upfront, the principal only needs to pay a fee to the surety company.

WHAT IS A CASH BOND?

A cash bond requires the full amount to be deposited in cash. This money is held as security until the obligation is completed. If everything goes well, the money is returned. However, if the principal fails to meet their responsibilities, the funds may be used to cover damages or other costs.

The benefit of a cash bond is that it avoids additional fees from a surety company. However, it requires having the full amount available, which may limit financial flexibility.

KEY DIFFERENCES BETWEEN A CASH BOND AND A SURETY BOND

The biggest difference between the two bonds is the number of parties involved:

• A cash bond is a two-party agreement between the principal and the obligee.
• A surety bond includes a third party—the surety company—which guarantees payment if needed.

Another key difference is how the financial risk is managed. With a cash bond, the principal must have the full amount available, putting their money at risk. In a surety bond, the principal pays only a portion of the total bond amount as a premium, with the surety company assuming the risk.

CHOOSING BETWEEN A CASH AND A SURETY BOND

A cash bond is simple but requires the full amount upfront, which may not be practical for larger projects. A surety bond allows financial flexibility but involves paying a premium to the surety company.

Most businesses, especially in construction, prefer surety bonds because they do not require tying up large amounts of money. However, for smaller projects, a cash bond may be sufficient.

RISKS OF SURETY BONDS VS. CASH 

• Cash Bonds: Require the full amount upfront and put all the risk on the principal.
• Surety Bonds: Offer more financial flexibility but require approval and a premium fee.

CONCLUSION

Both cash and surety bonds serve as financial guarantees, but they work differently. Surety bonds are often required in industries like construction because they provide security while allowing businesses to manage their cash flow effectively. If unsure about which bond to choose, consulting a bond professional can help determine the best option.