How to Get a Surety Bond
Whether you’re forming a construction company or an auto dealer, many large and small businesses are tasked with obtaining a license as well as a surety bond. If you need to apply for a surety bond, you should first understand how this process works and what costs you’ll need to pay.
Step-by-Step Process to Get a Surety Bond
The process for obtaining a surety bond is based on the type of company you work with. Here’s the step-by-step bonding process that must be completed to get a surety bond.
Choose the Appropriate Bond Type
The type of bond you need to apply for depends on the state you need to get bonded in. Every state has separate bond requirements. The types of bonds that might apply to your situation include:
- Contract bonds
- Commercial surety bonds
- Court bonds
- Fiduciary bonds
- Bid bonds
- License and permit bonds
- Fidelity bonds
- Probate bonds
- Notary bonds
Contract bonds are the most common and are typically required before a crew can get started on construction projects. These bonds are oftentimes referred to as performance bonds since the principal’s performance dictates if the bond will be paid out. Dealer bonds are commercial surety bonds that are required if you want to be a motor vehicle dealer.
Verify the Required Bond Coverage Amount
Once you’ve selected the type of bond you need, you’ll then be tasked with verifying the required bond coverage amount. For instance, anyone who wants to receive a contractor license in California will need to purchase a $15,000 surety bond. Keep in mind that the required amount for these payment bonds is increasing to $25,000 in California starting on January 1, 2023.
Gather the Information Required to Apply for Your Surety Bond
If you’re the business owner, you must fill out some basic information, which includes your:
- Business name
- Business address
- Ownership information
- License number
Apply for Surety Bond at a Bonding Agency
Once you’ve filled out your bond form, all that’s left is to submit it to a bonding agency that will provide you with competitive pricing. Consider obtaining a free quote before selecting a surety bond provider to work with. You can then make comparisons between different surety bond quotes to identify which one has the best price.
Sign All Policy Paperwork and Get Your Surety Bond
If your application is approved, you’ll likely be tasked with filling out and signing some additional policy paperwork, after which you’ll receive your surety bond.
File Your Surety Bond With the Obligee
Now that you have your surety bond in hand, make sure that you speak with your obligee about what to do next. They might require you to obtain a digital or raised seal. Before submitting your bond to the obligee, it should be signed. Once it’s filed, you’ve completed all of the steps for getting a surety bond.
Requirements to Obtain a Surety Bond
Not everyone will be eligible for one of these bonds. Being eligible is typically only possible if claims haven’t been made against your bonds in the past and you have a strong credit history.
For previous bond claims, this could be an issue depending on the reason for your bond being suspended, the amount of time the suspension lasted, and how long ago this suspension occurred.
When taking credit history into account, low credit scores and changes to a credit score aren’t always a problem when seeking a surety bond. Having bad credit usually means that you’ll need to pay more for the bond in question. Keep in mind that minors are unable to apply for a surety bond.
How Much Does a Surety Bond Cost?
The costs associated with a surety bond are a small percentage of the full bond amount, which is referred to as the bond premium. The surety bond cost you pay mainly depends on your credit history, the type of bond you’re applying for, and the amount of coverage that’s needed.
Let’s say that you need to obtain a $25,000 surety bond for your contractor license. If the surety bond rate is set to 5%, the cost of your bond would be $1,250. If a claim is made against your business, you could be required to pay the entire bond amount to remain in good legal standing. Some of the additional factors that can change the surety bond rate you pay include the:
- Size of your contract
- State where work occurs
- Type of work being performed
- Business owner’s personal credit
- Company’s financial strength
Following are some typical questions and answers to the surety bond process.
What Credit Score Do You Need for a Surety Bond?
Most surety bond companies want an applicant’s credit score to be at least 670 or higher. They also prefer people who don’t have any judgments, collections, or liens in their credit history. Your insurance company or surety bond provider may accept a score below 670 as long as you provide a higher payment for the bond in question.
Can You Get a Surety Bond at a Bank?
It’s common for surety bonds to be issued by insurance companies, banks, and other financial institutions. These bonds are typically handled by insurance agents, dealers, or brokers, which means that this individual will receive a commission for every sale.