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The cost of the surety bond is a percentage of the total bond amount. There are two main factors for determining your surety bond cost:
- The type of surety bond and the risk, associated with it
- The qualities of the applicant (you and your business)
There are three distinct types of surety bonds:
Commercial Surety Bonds are the most common type of surety bonds required of businesses. These include License and Permit bonds such as Contractor License, Motor Vehicle Dealers, Tax Bond, Mortgage Brokers and other professions or businesses that require the bond to operate their business legally. If you’re looking for license bond cost, use the navigation box on the right to jump to the commercial bond cost section or continue scrolling down.
Contract Bonds are required when you bid on a specific project or have been awarded a contract. Need a Bid, Performance Bond or Payment Bond for a job like building a school, repairing a public building or improving/developing land? This is your bond, use the navigation on the right to jump to the construction bond cost section.
Court Bonds are dictated by the courts in cases of Appeals, Guardianship and Estates. Use the Navigation on the right to jump to the court bond cost section of this page.
The premium you might have to pay will vary, depending on the type of surety bond you need and the factors considered during underwriting. It can range from 0.5% to more than 10% of your bond amount. Underwriters are people who are employed to evaluate the risk of loss that you pose to the surety company based on your credit history, experience level, available working capital, character, and other factors.
How Is the Bond Cost Calculated?
To understand how the cost of a surety bond is determined, it is important for you to understand the process of bonding, how surety bonds work, and the parties that are involved. Surety bonds are legally enforceable contracts between the following three parties:
- Principal - The party that needs to get bonded
- Obligee - The party that requires the principal to get bonded to obtain a license or perform work
- Surety - The company that issues the bond as a financial guarantee of the principal's performance and legal compliance
The bonding process starts when the obligee requires that your business secures a surety bond. In many cases, the obligee is a government agency. However, the obligee might be a private party for certain types of contractor bonds. As a business required to obtain a surety bond, your role is the principal.
Some of the types of professionals that are required to get surety bonds include the following:
- Notary public
- Auto dealer
- Freight broker
- Mortgage brokers
Once you learn that you have to get a surety bond, you will then need to determine the type of bond you need and your state's requirements for it. Federally required surety bonds, including freight broker bonds, have the same requirements in all states. However, certain bonds required by states for license purposes might have requirements that vary widely, depending on the state in which you intend to operate your business.
When you have determined the type of bond you need and the state's requirements, you will then work with a surety company to apply for the required bond. During the process, you will need to submit an application together with a number of documents to help the surety company evaluate your risk. The surety company will perform a credit check to determine your creditworthiness and level of risk before providing you with a surety bond quote.
Some of the types of documents you might be required to submit to the surety company include the following:
- Business and personal financial statements
- Business and personal income tax returns for the business owner
- Bank statement and letter of reference
- Balance sheets
- References from suppliers with which your business has contracted
- Certificate of insurance
- Work in progress form detailing all of the projects your company is currently engaged in
- Past projects completed within the past year
- Resumes of key personnel within your company's leadership structure
- Organizational chart
- Business address and phone number
These types of documents are generally required to aid the surety company's underwriters when they assess a variety of different factors, including your credit history, character, experience handling similar projects in the past, your available working capital, your assets, and others. The underwriting process is meant to help the surety company determine the risks of issuing you a surety bond, and it determines how much does a surety bond cost.
If the surety company decides to approve your surety bond application, it will provide you with a bond rate quote and the required surety bond premium. The premium you might have to pay will depend on the risk assessment performed by the underwriter.
If you accept the free quote for the surety bond rate, you will then pay the bond premium. The bond company will then file the bond form paperwork for your bond.
Surety companies calculate the cost of your bond based on the rate filings that state insurance departments have approved. Different categories of risk and corresponding rates or bond prices are assigned to each, and surety companies can then offer those rates to companies that need surety bonds based on the type of bond and the outcome of the risk assessment.
Bond-rating categories are used by surety companies for each of the different types of surety bonds. These categories reflect the anticipated risk for each type, and rates can range from 0.5% of the total bond amount to greater than 10%.
The cost of a bond will be increased for a partial year term or decreased for a multi-year bond term. Some surety companies offer discounts when principals purchase bonds that will last for two or more one-year terms. For example, you might receive a discount from a surety company if you pay the bond premium upfront for several years instead of only paying an upfront premium for a single bond term.
Some of the most important factors surety underwriters might consider when determining which rate category the surety bond you are seeking falls into are discussed below.
1. Credit History and Score
Your credit history and score will be strongly weighted by surety underwriters. They will look for things like your past payment trends, any past liens, bankruptcies, judgments, or charge-offs. Surety companies believe that your past credit history and your credit score demonstrate whether you will be likely to comply with the terms and conditions of your surety bond. For example, if you have a history of charge-offs, late or defaulted payments, and other similar problems, a surety company might believe that you will be likelier to violate the bond requirements and pose a higher degree of risk for the surety. By contrast, if you have excellent credit, the surety company might view you as posing minimal risk and offer you the best rates.
|Surety Bond Amount
|Applicant's Credit Score
|Excellent Credit Score (650 and above)
|Good Credit Score (600-649)
|Average Credit Score (550-599)
|Below Average Credit Score (549 and under)
|$5,000 Surety Bond
|$10,000 Surety Bond
|$15,000 Surety Bond
|$25,000 Surety Bond
|$30,000 Surety Bond
|$50,000 Surety Bond
|$75,000 Surety Bond
|$100,000 Surety Bond
|$500,000 Surety Bond
2. Business Credit and Experience
The surety underwriter will carefully evaluate the business documents that you are required to submit, including your company's audited financial statements and balance sheets, business tax filings, credit, and bank references, work in progress form, and others. Surety companies want to see the following multiple things when they evaluate your company:
- Sufficient working capital to cover the maximum bond amount
- Business assets to secure any claims that might be filed
- Good reputation with others for whom your company has performed work in the past
- History of meeting your business obligations
- Ability to handle the proposed project for which the bond is being sought
- Comprehensive liability insurance to cover potential losses
- Lack of bond claims in the past
- History of timely filing your business tax returns
These types of indicators demonstrate that your business can handle the anticipated project, will likely perform as promised, and will comply with all relevant state and federal laws. These factors also help underwriters determine that you will be able to indemnify your bond obligation if a claim is filed. If you are approved for a surety bond, you will be required to sign an indemnity agreement. If a valid claim is filed against your bond, the indemnity agreement will legally oblige you to pay it.
3. Licensing History
If you already have a license, a surety company or insurance company might review the relevant licensing database to determine whether you have had any history of complaints, violations of the law, or any claims filed against your license in the past. If you have a history of past claims, complaints, and legal violations, you are less likely to be approved for a surety bond. If a surety company decides to go ahead and approve your application, a poor history will likely mean that you will have to pay a high premium to secure your bond.
4. Moral Character
Another factor that surety companies consider is the principal's moral character. A surety company wants to see that a principal has a strong moral character because that indicates they will comply with the law and engage in ethical practices while operating their business. Surety bond applicants who have a history of unpaid bond claims and legal violations might be viewed as having problematic moral characters. Surety companies might also review an applicant's criminal record to identify any disqualifying criminal convictions the applicant might have.
In addition to these factors, a surety company might consider others when deciding whether to approve a surety bond application and its premium rate. In general, you can expect to receive the best rates if you have excellent credit, substantial working capital and assets, a good moral character, and significant business experience handling similar projects in the past.
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Is the Bond Amount the Same as the Bond Cost?
The maximum surety bond amount is not the same as your bond cost. For example, if you are required to secure a $50,000 surety bond, you will not have to pay $50,000 upfront to secure the bond. Instead, the maximum bond amount is equal to your liability and is known as the bond's penal sum. The premium you will pay to get the bond will be a percentage of the total amount. However, if a claim is filed against your bond and you fail to pay it, you can be held liable for up to the maximum amount of your bond.
Surety Bond Costs by Bond Type
The rates for bonds also can vary by different types of bonds. Typically, you can expect to be charged a higher rate for a payment bond or a tax bond than those that guarantee compliance with permit or license requirements. The costs of different surety bonds by bond type are discussed below.
Commercial bonds include license bonds, permit bonds, fidelity bonds, and others. In most cases, license and permit bond underwriting generally emphasizes the owner's personal credit history and score. This is especially true for bonds with low required amounts below $50,000. Some examples of these types of bonds include contractor license bonds, mortgage broker bonds, and auto dealer bonds. Depending on your credit record, you might be able to secure a license and permit bond for a very low rate. The bond amounts for many of these types of bonds are also fairly low, helping to reduce the risk.
Contract bonds are also known as construction bonds and are normally required by the state or federal government when a contractor will be awarded a contract or wants to bid on a proposed public construction project. Some private parties might also require contractors to be bonded before they will agree to enter into contracts with them.
Fast Track Contract Bonds
There are several surety markets that will write credit-based contract bonds. Typically, this type of app is used when the job is $500,000 or less, you (the contractor) have no or limited bonded experience, and your credit is strong (read 650+ clean). A contractor using a credit-based program can expect a premium that is 3% of the bond amount required. While a few markets will consider those with lesser credit, the majority do not.
Full Bond Line Projects
For experienced contractors that need a full bond line (larger jobs, or contractors that are doing several jobs at once), a more thorough underwriting process will take place. Financials (2-3 years of CPA-prepared, reviewed financial statements (not tax returns), on an accrual, cost-of-completion basis with full notes and disclosures), Work on Hand schedule, bank reference letter and more will be reviewed. Full bond lines are quoted on a sliding scale, so the larger the job, the smaller the bond rate will be.
Courts sometimes require bonds. These bonds might be required for those who are appointed as administrators to handle probate estates and in similar situations. The rates for court bonds are typically low and might range between 0.5% and 1% of the bond amount. However, the rates might be slightly higher if the court imposes extraordinary requirements or when the bond amount is low. Court bonds generally require people to have excellent personal credit.
The cost that you might have to pay for a surety bond will depend on your bond type, credit history, financials, and other factors. If you have great credit, good working capital, and an excellent reputation, you might expect to pay the lowest possible rates. If you have marks on your credit or have limited experience, you might expect to pay a higher rate. However, once you secure a bond, you can work to avoid claims and improve your credit so that you might secure better rates in the future.
Can You Get a Surety Bond With Bad Credit?
It is possible for you to get a surety bond even if you have poor credit and a low personal credit score or if you have had a claim filed against a previous surety bond. However, having a poor credit history or past bond claims will mean that you will be placed in a high-risk category, and you will have to pay a higher premium percentage of the total amount of the bond upfront to secure your surety bond.
An applicant or new business with bad credit or minimal credit history should expect to pay higher premiums for surety bonds. Applicants are assessed based on their perceived risk levels, so if you have bad credit, your risk level will be perceived as being greater than if your credit history is good.
Applicants that are new companies that do not yet have stable cash flows and those with past credit issues will generally be viewed as higher risk. Surety companies want to make sure that the principals to whom they issue bonds will be likely to meet their contractual obligations. For this reason, the premium rate that might be used will vary, depending on your credit score. However, it is still possible to be approved as long as you can pay a higher initial premium. To determine the rate that you might have to pay, you can use a bond cost calculator
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