Many industries require a surety bond to cover their respective risk category, whether a financial guarantee, probate bonds, or construction bonds. Bonds are required by government legislation that demands surety bonds for licensing, permitting, or working on government contracts. The regulations may come from the city, county, state, or national level. Getting bonded can sometimes be confusing for many reasons, as surety bonds are often mistaken for insurance policies. In actuality, they are agreements involving three parties, serving as a performance guarantee or financial guarantee.
We know. It can be a confusing process! So we have created this simple guide for you. You’ll be a surety bond specialist in no time!
Surety Bond Need to Know – The Basics
Before you purchase surety bonds, you need to understand what a surety bond is, what the surety guarantees, who the three parties involved are, and why you need a surety bond. Once you have that information, we can dig more deeply into how to get bonded.
What Is a Surety Bond?
A surety bond is a written agreement serving as a guarantee between the applicant or service provider, the buyer of the service, and the surety company or the company that issues surety bonds. The bond protects the buyer, also called the Obligee, by offering financial restitution if the service provider also called the Principal fails to meet its obligations and causes the Obligee financial loss as determined through a validated claim.
Who steps in? The surety company issuing the bond remedies the default to benefit the Obligee up to the predetermined bond amount and subsequently seeks to recover against the Principal.
For example, a contractor may need a surety bond before being hired to pave roads for a city. This protects the town if the contractor defaults on their obligation to perform the construction project, whether they don’t complete the job as agreed upon under the contract or perhaps the contractor suffers bankruptcy. Surety bonds ensure that the city is not left with an incomplete construction project or suffers financial loss due to the contractor’s inability to perform.
If bonded and the contractor completes the job, they are paid in full by the city. If they do not complete the job, or if there is any damage done, the city has the right to claim the performance bond, and if validated, the surety company will step in and cover the costs.
This is only one example of many. Surety bonds exist in several different varieties and cover a wide range of services. They all guarantee the protection of the client or Obligee.
What Does Bonded Mean?
Being bonded means that you have met the government’s requirements to obtain a surety bond. This often signifies that you are a reliable and trustworthy individual or company with a good credit history.
When bonded, it means that you have agreed to meet the terms and conditions of the surety bond. If you do not meet these terms, the surety company is authorized to take action against you. This could include recovering any financial losses the Obligee incurred due to your actions.
How Does a Surety Bond Work?
As we’ve learned, a surety bond is a three-party agreement involving the Obligee, the Principal, and the surety company. The Obligee is the party requiring the bond. The Principal is the individual or company that needs to be bonded. The surety company is the entity that issues the bond. The Principal pays the premium even though it’s the Obligee that benefits. The big difference between surety bonds and an insurance policy is that the premium payer is the beneficiary.
The purpose of a surety bond is to protect the project owner in case the Principal fails to meet its obligations. Whether the Principal doesn’t complete the job as agreed upon under the contract, suffers bankruptcy, or any other number of reasons.
If this happens, the surety company will step in and cover any financial losses incurred by the Obligee. The surety company does this to protect its reputation as a guarantor.
But how do bonding companies ensure they can recover losses?
The indemnity principle helps ensure that a surety company can recover any losses that the Obligee incurs. This indemnity agreement upholding this principle essentially states that the Principal is held liable for any damages caused by their actions, and the surety company has a legal right to seek recourse.
Meaning the surety company is not responsible for any damages and can instead seek restitution from the Principal. It helps to protect the surety company from any potential financial losses.
It also protects the Obligee from any damages that the Principal may cause. Therefore, it’s so important for a principal to have a good credit history – it shows that they are likely to meet their obligations and won’t cause any damage or financial loss to the Obligee.
Why are surety bonds required?
Surety bonds are required by many government departments to safeguard customer interests. Before business owners operate in specific jurisdictional regions, they must often acquire surety bonds. Because bond rules are determined at the local and state levels, you must look for regulations that pertain to your industry sector.
With an ever-increasing number of bonding rules in almost every sector, we strongly advise new businesses to collaborate with their industry associations, regulatory agencies, and qualified bond companies through the use of a surety expert.
Do surety bond costs vary for different states?
Yes. Surety bonds can differ depending on the jurisdiction because each government department has insurance and performance guarantees regulations, which correspond to the premium charged by bond companies, as does the bond type. For instance, payment bonds, construction bonds, probate bonds, fidelity bonds, license, and permit bonds carry different bond costs. They are different types of surety bonds on top of the agency requiring it.
For instance, according to the state and sometimes county or city where it is based, a required notary bond amount is typically $5,000 for a bond cost of about $500. However, some other states may require a $10,000 bond or require errors and omission business insurance policies along with it. The surety bond requirements can vary across the board.
Getting a Surety Bond: Step-by-Step
1. Determine what type of surety bond you need.
When it comes to determining what type of surety bond you need, the most important thing is to know what the bond is for. Different bonds types are created for various purposes, so it’s important to know what you’re trying to protect. Here are some things to consider:
- What type of business are you in?
- What needs to be guaranteed?
- Are you looking for a contract surety bond or commercial bond?
- What is the credit score of your business?
Typically the surety bond requirement will be stated in the service contract, outlined by government agencies regulating your industry, or part of the business license application.
2. Search for a qualified surety bond company.
When searching for a qualified surety bond company, it’s essential to do your research. Many companies offer surety bonds, but not all are created equal. Make sure to find a company with experience in the bond type you need. Simpli Surety works with top-tier bonding companies, and our surety experts have been in the surety business for 40 years.
3. Complete our online surety application process.
When applying for a surety bond, you’ll need to provide some vital information about your business. Including the applicant’s credit score, financial history, bond form (if provided), the bond amount needed, and the required bonds guarantee as evidenced by contract documents. Be prepared to provide documentation to support your application.
The surety bond application process can vary depending on the bonding company you’re working with, but generally, it will involve completing a form and providing supporting documents. Simpli Surety has thousands of bonds available through our online application portal. Our process is streamlined and simplified to get you bonded quickly and easily, often in a matter of minutes.
4. Once the paperwork is approved, pay the premium and receive your surety bond.
If you’re approved, Simpli Surety will email you a copy of your bond and indemnity agreement for signature. Once signed and the premium paid, a bond copy will be sent to the Obligee, and you’re all set!
If you’re not approved, our experts will help you understand why and may be able to suggest ways to improve your application.
Underwriting a Surety Bond
The surety bond underwriting process evaluates the transaction and the applicant who wants a surety bond. The underwriting analysis determines if the surety company will take on the risk or not.
It’s important to note that the underwriter doesn’t just look at the applicant when making a decision – they also assess the potential risk of the project or contract.
To qualify for any type of surety bonds, applicants need to fill out an application, answering questions about where they’re based and how much outstanding risk they carry. Usually, the surety bond underwriter will want to know the following but not limited to:
- How long has your business been in operation?
- What is the size of your company, and how many employees do you have?
- Have you had any legal issues or financial problems in the past?
- What is the nature of your business?
- What is the value of the contract or project you’re looking to get bonded for?
- What is the credit score of your company and its principals?
The underwriter for the surety needs all background information and appropriate documentation before surety bonds can be procured. The underwriter will closely examine your financial statements. They will request information on future business plans. Depending on the type of business you own and the bond type you seek, they may have few or many documents to investigate.
Bond companies go through the underwriting process to protect themselves. They are liable for the total amount of the bond, regardless of the circumstances. Before seeking the surety bond, you should be prepared to review your business details.
What is an Indemnity Agreement?
An indemnity agreement is a legal contract between two or more parties in which one party agrees to compensate the other for any losses or damages that may be incurred. In the context of surety bonds, the indemnity agreement protects the surety company from any financial losses covered by the bond. It also protects the Obligee – the party that requires the bond – from any losses due to the bond.
The indemnity agreement is an integral part of any surety bond transaction and should be read and understood by all parties involved. It lays out each party’s responsibilities and liabilities and helps protect everyone involved if something goes wrong.
You must sign an indemnity agreement for the applicant to a surety bond. If there are multiple owners in your business, every person who owns more than 10 percent must sign as well. The indemnity agreement states that you will repay the surety if they must settle a surety bond claim.
It should be noted that an indemnity agreement is always required for all bond types. Don’t be surprised if required to sign an indemnity agreement for a bond that is not comprehensively underwritten, such as some license and permit bonds.
How Much Do Surety Bonds Cost?
The bond cost is called the surety bond premium or the surety bond rate. The surety bond cost is based on the obligation needing bonding and the applicant’s credit profile. On average, rates hover around 1-3% of the contract price or bond amount while going as high as 8-10%.
Is your credit excellent? You are in luck. Your surety bond cost should be no more than three percent of the total bond coverage. It could be as low as one percent or even less. Average credit, a score of between 600 and 675, will incur a cost of three to five percent of the total surety bond amount.
A score of 599 or less represents poor credit. If you can secure a bond, you should not be surprised by a 10 percent upfront cost. The amount could be less, but it is often more.
Does it cost more for new business owners to get a surety bond?
The cost of bonds varies according to the amount and the financial history of the business owner. Business owners with strong credit scores will typically be offered competitive pricing. Business owners that have yet to establish strong lines of credit will most often need to rely on personal credit scores and indemnity to secure bonding.
How long does it take to get a Surety Bond?
Getting surety bonds is often quick and easy to obtain with Simpli Surety. Our underwriting process is automated, allowing fast approvals and immediate pricing. The approval of applicants often happens the same day, and the executed bonds are delivered upon applicant signature and payment. Sometimes more info might have to be provided by the applicant on more complex cases.
What are Different Types of Surety Bonds? Contract Bonds vs. Commercial Bonds.
A contract bond, commonly known as a performance bond, is arguably the most common. A performance bond states that you will complete the work you have agreed to satisfactorily as per the underlying contract terms.
You may also hear the term “contractor bond.” A contractor bond is a bond required for all construction businesses.
Another type of contract bond is a payment bond. These bonds guarantee that you will pay your employees, vendors and pay for the cost of materials.
The government usually requires a commercial surety bond for service providers to protect the public interest.
Commercial bonds are specific licensing and permits bonds covering professionals from mortgage broker to dealer to telemarketer.
Common Problems Getting Bonded
There are times when an organization runs into hiccups while getting bonded. An expert surety agent will help you rectify situations that impede your ability to secure a bond. Still, you should be prepared for some of the more common problems that may happen.
Low Credit Score
A low credit score is a primary problem with securing a surety bond. Low business or personal credit can make sureties want to avoid doing business with you because they may worry that you won’t be able to pay back a claim. The lack of good credit also speaks poorly to your ability to comply with contractual obligations.
Changing Bond Requirements
Bond requirements can swiftly change. You may have everything ideally in place only to find that a new condition has been added.
Bonds Claimed Against You
Do you have a history of not being able to complete a job to a client’s satisfaction? If you have ever had a bond claim against you, a surety might decide that you are too risky to be bonded.
Tips to Get a Surety Bond
If you’re looking to get a surety bond, don’t worry – it’s not as difficult as you might think. You can follow a few tips to make the process easier and faster.
Work With a Surety Broker
An organization’s biggest mistake when getting bonded is navigating the confusing and treacherous waters of surety bonds without help. You need a surety broker or agent to facilitate the transactions and help you with any pitfalls that may come your way.
Excellent surety agencies act as both facilitators and guides. You can release a great deal of stress by using a surety agency with an established history of providing the best service.
Can I get Surety Bonds from an Insurance Company?
Getting a surety bond from an insurance company is possible. However, it is not always easy. You will need to have a good credit score and be in good standing with the insurance company. There are also some situations where an insurance company will not provide a surety bond. It’s best to get a bond through a surety brokerage, and many insurance companies will point you in that direction as well since surety is often not their expertise.
Keep Your Documentation in Order
Your business’s documentation and financials are needed when seeking a surety bond. Keep your documentation in place to easily present it to the surety company when asked. Being able to produce required material quickly will help to speed up the process.
Establish Good Credit
It may seem easier said than done, but establishing good credit is paramount to running a successful business. Make sure to pay all debts on time. Take out a revolving line of credit and pay monthly with no delinquencies. Do not use all of the credit that has been extended to you.
Protecting your credit is essential in your business and your personal life. Underwriters will examine both credit scores to determine how much you pay for the premium or whether to issue bonds at all.
Stay Abreast on Recent Developments
Always know what requirements are in place for the surety bond you need. The surety bond must be renewed annually, which means you will need to follow all new requirements even after your initial bond is granted. Once you renew the bond, you will need to present evidence showing that you uphold the new rules.
Rectify Past Mistakes
No one is perfect, which means you may have made some business mistakes in your life. It is okay to admit these mistakes as long as you are willing to learn from them. If a bond has been claimed against you, study what happened and make a written plan detailing how you will avoid the same issue(s) in the future.
The cost of your surety bond may still rise if you have had financial difficulties or if a bond claim was made against you. Be prepared for any higher premiums that may come your way.
Pay Attention to Expiration and Renewal Dates
Getting a surety bond doesn’t end after being approved one time. You will need to regularly renew your bonding status if you continue to work in your chosen field. Don’t forget to stay abreast of changes to bonding requirements and do not let your surety bond status lapse.
Tell me the best place to get a surety bond?
When looking for a surety bond, one of the best places to start is online with Simpli Surety. We are a nationwide provider of surety bonds, and we have a wide variety of bonds available for purchase. We also have a simple online application process to get your bond quickly and easily.
Simpli Surety is committed to providing excellent customer service. We have a team of experts who can help you through the bonding process, and we are always here to answer any questions you may have. Contact us today to get started on obtaining your surety bond!
Wrapping Up
In conclusion, getting a surety bond can be difficult. But if you follow these steps, it will be much easier to get bonded and avoid making the same mistakes that may have cost your company in the past. It is crucial to understand how bonding works before jumping into any deals with sureties. Being well-informed can save your company a great deal of money and stress. Search for your surety bond online today.
