What is a Surety Bond?
A surety bond is a three-party guarantee in which a surety (the guarantor) guarantees to an obligee (the party protected) that a principal (the party performing) will fulfil its obligation. If the principal defaults, the guarantor pays the obligee up to the bond amount. ERGO issues it as a letter of guarantee (carta fiança).
Key facts at a glance
- Three parties: the surety (the guarantor that issues and backs the guarantee), the principal (who must perform), and the obligee (who is protected).
- What it guarantees: the performance of an obligation — not a loan, deposit, or line of credit.
- How it works: the guarantee protects the obligee, and the principal reimburses the guarantor for any valid demand it pays, under a counter-guarantee.
- Cost: set by quote after analysis, based on the risk, the bonded amount, the term, and the bond type, because the guarantor analyzes the principal rather than holding cash collateral.
- Main types: bid, performance, payment, advance-payment, judicial (court), and customs bonds.
The three parties to a surety bond
| Party | Role | Who they are |
|---|---|---|
| Surety (guarantor) | Issues and backs the guarantee; pays valid demands up to the bond amount. | The guarantor — in ERGO's case, ERGO ASSURANCE S.A., which analyzes the principal before issuing. |
| Principal | Must perform the obligation; reimburses the guarantor for any amount paid. | The party performing — the contractor, supplier, or company being guaranteed. |
| Obligee (beneficiary) | Is protected by the guarantee; calls it if the principal defaults. | The party protected — a public authority, court, or private client. |
Main types of surety bond
- Bid bond — guarantees a bidder will honour its bid and sign the contract if awarded.
- Performance bond — guarantees the principal completes the contracted work.
- Payment bond — guarantees subcontractors and suppliers are paid.
- Advance-payment bond — secures an advance paid to the principal.
- Judicial (court) bond — may replace a cash deposit in litigation, if the judge accepts it.
- Customs bond — guarantees duties and obligations owed to customs authorities.
Definition & how it works
A surety bond is a legally binding, three-party guarantee in which one party — the surety, or guarantor — guarantees to a second party — the obligee — that a third party — the principal — will meet a defined obligation. The obligation is usually contractual: completing construction, honouring a bid, paying subcontractors, or satisfying a court or customs requirement.
Before issuing the guarantee, the guarantor analyzes the principal, assessing financial strength, experience, and the nature of the obligation, much like a credit analysis. Because the guarantee rests on the principal's creditworthiness rather than pledged cash, a surety bond usually requires little or no collateral and stays off the balance sheet.
If the principal fails to perform, the obligee calls the guarantee. The guarantor examines the demand, verifies the default, and pays valid demands up to the face value of the bond — the bond amount, or penal sum. The principal is then obliged to reimburse the guarantor, so the guarantor expects to recover what it pays, which is why pricing is low relative to the sum guaranteed.
The three parties explained
The surety is the guarantor that issues the bond and stands behind the principal. Its promise to the obligee is what gives the bond value. The guarantor only pays a valid demand, and it prices the guarantee based on the risk that the principal will default. ERGO ASSURANCE S.A. is a guarantor that has issued letters of guarantee (carta fiança) to companies since 2002.
The principal is the party whose performance is guaranteed — the contractor bidding on a project, the supplier delivering goods, or the company subject to a court order. The principal obtains the guarantee and signs a counter-guarantee promising to repay the guarantor for any demand it honours.
The obligee is the party the bond protects. It is the beneficiary of the guarantee: the government agency awarding a contract, the court holding a case, the customs authority, or the private client. If the principal defaults, the obligee is the one who can call the guarantee.
Surety bond vs bank guarantee vs cash deposit
A surety bond protects a third party — the obligee — and the principal must reimburse the guarantor for any demand it pays. In effect, the guarantor lends its credit standing to the principal for a specific obligation, which is why it analyzes the principal before issuing.
A surety bond also differs from a bank guarantee (fiança bancária). A bank guarantee is a bank instrument that draws on the principal's credit line and usually pays the beneficiary on demand, with little inquiry. A letter of guarantee issued by a guarantor such as ERGO leaves bank lines free, and the guarantor examines a demand under the terms of the guarantee before paying.
Against a cash deposit, the practical consequences are cost and capacity. Because a surety bond rests on analysis rather than cash collateral, it preserves liquidity and keeps the obligation off the balance sheet, while a bank guarantee freezes credit. Acceptance always depends on who requires the guarantee: the judge, the tender notice, or the contracting party.
How to get a surety bond
Getting a surety bond starts with identifying the obligation you need to secure — the contract, tender, court order, or customs requirement — and its value, which sets the bond amount. The obligee usually specifies the type of guarantee and the wording it will accept.
You then apply to a guarantor, which analyzes the request: it reviews the company's financials, track record, and the specifics of the obligation, and quotes a fee. Stronger financials and a solid history mean better terms and higher available capacity.
Once approved, you sign a counter-guarantee and pay the fee, and the guarantor issues the guarantee to the obligee. ERGO issues its letters of guarantee digitally, with an ICP-Brasil certificate, and the process is designed to preserve your credit lines — you can request a tailored quote online or speak with a specialist.
Frequently asked questions
What is a surety bond in simple terms?+
A surety bond is a promise, backed by a guarantor, that a company will do what it agreed to do. If the company fails, the guarantor (the surety) pays the protected party up to the bond amount and then recovers that money from the company. It is a guarantee of performance, not a loan.
Who are the three parties to a surety bond?+
The surety (the guarantor that issues and backs the guarantee), the principal (the party whose obligation is guaranteed, such as a contractor), and the obligee (the party protected by the guarantee, such as a public authority, court, or private client).
What does ERGO issue?+
ERGO ASSURANCE S.A. is a guarantor. It issues the letter of guarantee (carta fiança) and contract guarantees — judicial guarantee, performance bond, bid bond, advance-payment and retention guarantees — to companies only. It is not a bank and does not lend money; pricing is always set by quote after analysis.
Is a surety bond the same as a bank guarantee?+
No. A letter of guarantee issued by a guarantor such as ERGO keeps your bank credit line free, and the guarantor examines a demand under the terms of the guarantee before paying. A bank guarantee is a bank instrument that ties up your credit line and usually pays the beneficiary on demand. They serve similar purposes but differ in structure and cost.
What happens if the principal defaults?+
The obligee calls the guarantee. The guarantor examines and verifies the default, then pays valid demands up to the bond amount. The principal must reimburse the guarantor for whatever it pays, under the counter-guarantee signed when the guarantee was issued.
How much does a surety bond cost?+
The cost of a surety bond is set by quote and depends on the risk analysis, the principal’s financial strength and track record, the term, and the type and size of the obligation. Because the guarantor analyzes the principal rather than holding cash collateral, you do not freeze the equivalent amount in cash. Get your quote online through the app or on WhatsApp +55 11 93444-0099.
Need a guarantee for your obligation?
ERGO issues letters of guarantee (carta fiança) that guarantee your company's obligations without freezing your credit line. Get a tailored quote or talk to a specialist.