Businesses around the world face ongoing expense burdens, regardless of the type of industry they are in or the size of the company they operate. In many professions, surety bonds are required as part of the licensing process, adding to the expense list for many business owners. Surety bonds vary greatly in price (check the cost here), however, based on several driving forces. Below are the top four items that affect the cost of surety bonds for business owners and licensed contractors.
The Type of Bond
Different businesses have varied needs for surety bonds, all meant to protect the customer or client should things not go as planned. The type of bond required depends heavily on the industry the bondholder works in. For instance, a licensed construction contractor may be required to hold a bond of a certain amount if he or she works on residential, commercial, or a combination of projects over a certain dollar amount. Similarly, auto dealers, mortgage brokers, and other licensed professionals require surety bonds as part of their licensing process to work legally in the state in which they operate.
Not all surety bonds are the same in terms of the amount of the bond for these reasons. The higher the surety bond put in place, the higher the cost to the bondholder.
Business and Personal Financial History
One of the biggest driving forces behind the cost of a surety bond for a contractor or other business owner is related to financial standing and credit history. Surety bond agencies extend a form of credit to bondholders. When a claim is made against a bond, the agency pays damages or losses to the customer, not the bondholder. The bondholder is then required to repay the surety bond claim amount over time. Because of the way surety bonds work, business and personal financial history drive cost.
When an individual has less than ideal credit, due to late payments, bankruptcies, court judgments, or collection accounts, a surety bond agency views them as a higher risk. The same rings true for businesses that have not been in operation long, or those that have an extensive history of surety bond claims in the past. These factors are seen as negatives for surety agencies. However, those who have strong credit, organized and accurate financial records for the business, and minimal claims history will pay a lower amount for their new bond.
Government regulations also play a role in the cost of a surety bond. These issues also correlate to the type of industry a business or contractor works in, as well as the state or municipality in which the business operates. For instance, freight brokers are required to have a surety bond of no less than $75,000, regardless of where they work. Other professionals, like construction contractors, have specific requirements for bond amounts based on the county, city, or state where they perform their work. These government regulations either on a federal or state/county level can have a drastic impact on the price paid for a new surety bond. The higher the bond amount, the higher the cost.
In addition to government regulations, personal and business credit history, and industry type, surety bond pricing may also be impacted by financing. There are some surety agencies that allow individual bondholders to finance the price of a surety bond over time, instead of paying a significant lump sum all at once. Financing can be beneficial from a cash flow perspective, but it does come with some caveats. A financing agreement for a new bond may include interest charges that add to the total price tag. It is important to review financing agreements closely before signing on the dotted line.
Surety bonds are a necessary part of doing business for many professionals, but the price paid for a new bond varies based on the handful of factors mentioned above. Be sure to consider your options for the surety agency you work with to ensure it understands your business, your bond needs, and your financial history to ensure you get the best bond at the best price.
You may also like: How Surety Underwriting Works
About the Author
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.