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Are You Surety? You don't have to eat the loss when a supplier screw-up hurts your business.

By Jacquelyn Lynn

Opinions expressed by Entrepreneur contributors are their own.

You contract with a technology company to develop an expensivecustomized software package, but they fail to deliver. Do you haveany recourse other than filing a lawsuit? You do if you requiredthat vendor to provide a surety bond as a condition of yourpurchase agreement.

A surety bond is a special type of insurance where the suretycompany guarantees to one party (known as the obligee) that anotherparty (known as the principal) will fulfill a contract orobligation. These bonds are most commonly used in the constructionindustry, but they are suitable for use in a variety of commercialsituations.

According to Robert J. Duke, director of underwriting for theSurety Association of America (SAA), surety bonds are usefulwhenever you're contracting for products or services and afailure to perform on the part of your supplier could result in aneconomic loss for your company. If the principal defaults, thesurety company will then step in and do one of two things: Eitherit will fulfill the contract through another source or it willprovide you with financial compensation. Duke says the cost of asurety bond typically ranges from 0.5 to 2 percent of the bondamount.

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