If you’ve been thinking about starting your own business, one of the main things to consider is whether you need to obtain a surety bond. The bond is often a mandatory prerequisite to get a license and begin operation.
Even if obtaining a surety bond is not a new process for you, on the whole, it can be quite confusing as people hardly know where to begin. After all, there are some 50,000 types of surety bonds to pick from, and even that can be quite challenging.
We, at Bryant Surety Bonds understand how confusing the whole process of obtaining a surety bond can be. We want to help you learn more about surety bonds, so let’s clarify a few things by looking at the basic definition of bonds and what anyone shopping for a surety bond should know.
What Is a Surety Bond?
In general, a surety bond is a three-party agreement. One part is the Principal or the entity that needs to obtain the bond; the second part is the Obligee, or the one requiring the bond, and the third part is the Surety Bond Company that assures the Obligee that the Principal can complete the job as agreed.
How Does a Surety Bond Work?
In case you are wondering what the purpose of a surety bond is, it’s easiest to think of it as a safeguard against unfair practices. The bond may seem to resemble insurance, but in fact, it’s more of a consumer protection policy. If you don’t fulfill your agreement or don’t comply with state regulations regarding your line of business, a claim can be filed against you demanding compensation for certain losses. Then, your surety bond company will take over and cover what is due.
Types of Surety Bonds
There are three main types of surety bonds:
- Commercial Bonds. These are also known as license and permit bonds. Hundreds of businesses are required to purchase a commercial bond so that they can get a license to operate in any given state. This category is the most diverse in that it covers a wide array of businesses. You will need a commercial type of bond if you are planning to enter the auto industry, the freight transportation, or the trucking industry; if you want to become a mortgage broker, a telemarketer, an alcohol manufacturer, and more.
- Contract Bonds. Just as the name suggests, contract bonds have to do with contractors and construction projects. They guarantee that a contractor will comply with the terms and conditions laid out in the contract with the project owner, and will perform the job as promised. The most common contract bonds are bid bonds, performance, and payment bonds.
- Court Bonds. Again, just like commercial bonds, there is a great variety of court bonds, depending on your particular situation and needs. Some court proceedings require court bonds before you file a particular type of claim or appeal a case. If you, as the principal, don’t complete the task required of you, the court will charge you for the court costs. Make sure to secure a surety bond in case you need to appear in court for whatever reason.
How Much Does a Surety Bond Cost?
Unfortunately, there isn’t a straight answer to this question. The premium you’d have to pay on a bond depends on how much the bond is itself. And since bonds come in many different amounts, the premium also varies.
Generally, if you have a good credit history, the surety bond company will calculate your portion somewhere between 1% and 5% of the total bond amount. Keep in mind, however, that since the surety bond is more of a credit lent to your business by the surety bond company, the latter assumes a 0% loss rate.
On the other hand, even if you have bad credit, it doesn’t mean that you cannot get bonded. Bryant Surety Bonds has a Bad Credit Program that can be a good option if your credit score is low. The only downside of the Program is that it works for commercial bonds only. You can apply online, get a quote, and instant approval.
One more thing to consider in this case is that normally candidates with bad credit will be required to pay slightly higher rates, usually between 5% and 15% of the total bond amount. In some instances, you may be asked to pay a small percentage of cash collateral, but despite all additional requirements, this still beats not being able to get bonded, at all.
When and How to Renew Your Surety Bond
Bond renewal dates vary widely – your personal renewal date will depend on the surety bond type, your line of business, and in which state you’re operating. Most bonds have to be renewed annually along with the license that gives you the right to operate legally; some are valid for up to two years. It’s your responsibility to find out when your bond and license expire. Requirements vary depending on whether you are an auto dealership owner; you have a liquor store or are a freight broker. This is crucial, because if you fail to renew them, you’ll be running your business illegally, and subsequently, be penalized for it.
In addition to knowing when the deadline is, be sure to start your renewal application process early. Don’t wait until the last minute, because you’d be putting yourself at risk of losing your license if something goes wrong and you are late.
As far as how to renew your bond(s), check with your local government what the requirements are. Nowadays, all paperwork can be submitted online, so all you need to find out is which website you need to go on.
Hopefully, this article has helped make clearer what a surety bond is, how it works, and how your premium is calculated. We also hope you walk away with a better understanding of why it’s important to remember to renew your bond along with your license.
One last thing: Don’t shop for a surety bond with too many bond agencies, because it may get even more confusing. Pick one, get a quote, and get bonded. Bryant Surety Bonds can help you go through the bonding process as smoothly as possible.
Call us at 866.450.3412 now and get started!