BUSINESS SOLUTIONS

What is a surety bond?

Definition: In the simplest terms, a surety bond is a guarantee. What the bond guarantees varies depending on the language of the bond. It is a form of credit, not insurance.

What is the process to obtain a bond?

To start the process you need to apply. Your agent will usually have an approval for you anywhere from that same day to 4 business days. You will then be given your premium cost and an agreement between you and the bonding company. The bond is then issued 1-2 business days from receipt of payment and the agreement (original agreement is often required).

How do surety bonds work?

The principal (you) pays a percentage of the bond amount called a bond premium. In return, the surety extends "surety credit" to make the required guarantee (the bond). A claim can arise when the principal does not abide by the terms of the bond. In the event of a claim, the surety will investigate to ensure it is valid. If the claim is valid, the surety will look to the principal for payment of the claim and any associated legal fees.

What good is a bond if I have to pay for claims?

A bond is not insurance, it is a form of credit where the principal (you) are responsible to pay any claims. The alternative to a bond is to post cash or a letter of credit. Surety bonds are advantageous, as they typically require no collateral, which frees up capital. Bond premiums are also similar to fees for letters of credit and are typically less than one would earn making conservative investments with the available capital.

How much do surety bonds cost?

Bond premiums vary greatly depending on the applicant, the bond type, surety, and the obligee. Just like other forms of credit, everyone does not receive the same rate. Standard market rates are typically anywhere from 1-3%, while higher risk markets can range anywhere from 5-20% of the bond amount.

Why do I need a surety bond?

Simply because a government authority or private entity is requiring the bond in order for you to operate. The bond ensures you will follow their guidelines.