Surety bonds are an investment by which you opt to back a construction project loan or some other type of financing for someone who cannot get money on his/her own. You can use surety bonds to expand your investment portfolio, but they definitely should not be the only thing in which you invest. There are some risks with surety bonds, as with any investment, as well as some returns.
For starters, there is always the risk that the loan, company, and/or project you back fails to go through or the person needing the loan fails to repay. At this point, you would have to play a waiting game to see if the individual or company turns things around and makes good on the loan or defaults entirely. If there is a complete default, your guaranteed investment via the bank (which is often the amount you initially used to back the bond) is returned to you, with nothing extra attached.
If the loan or project is completed or paid in full, the interest garnered or profits made are split among you and any other investors that bought surety bonds for this particular loan or project. You make a profit and are able to reinvest your profits in more surety bonds. Of course, you are taking fresh new risks, too.
Returns on surety bonds come in the form of interest earned on loans, property secured by the loans or project attempted, profits made by the project, and/or a mix of all of the above. It depends on the terms of the surety contract. If you find that you are in possession of property you do not want (as is the case with backing jail bonds and the person's house is collateral), you can always sell the property for cash. In some states, there is a waiting period for the debtor, owner, or borrower to reclaim, refinance, or recast their financial stance and their property, but if they fail to do so, what they lose is yours.
How to Invest in Surety Bonds
Talk to an investment broker or a financial advisor. Both can point you in the direction of companies that sell surety bonds as well as local businesses that may have some bonds opportunities available. Follow the advice of your investment broker or banker and do not invest in any surety bonds that you have not checked through them first. Contact a company like NFP, P & C, Inc. to learn more.