A three-party guarantee that compensates your customer if your business fails to complete work or violates the terms of its license.
A surety bond is a promise, backed by a bonding company, that your business will do what it committed to do. Three parties are involved: your business (the principal), your customer or the state (the obligee), and the bonding company (the surety). If your business fails to complete a job, violates license requirements, or otherwise breaks the commitment the bond covers, the customer can claim against the bond and the bonding company pays them, then collects from you.
Bonds are most common in the trades. Most state contractor licenses require a bond as a condition of holding the license, and many commercial and government clients require proof of bonding before work begins. The bond amount is set by the state or the contract; what you pay is a yearly premium that is a small percentage of that amount, priced partly on credit history.
A bond protects your customer, and that makes it different from liability insurance, which protects your business when you cause damage or injury. The two cover different risks and businesses that need one usually need both.