For many, surety bonds are a recurring expense. This is because most of these bonds are required to be renewed yearly.
During the bonding process, the underwriters review various factors, such as your work history and credit score, to assess your risk level. Applicants with bad credit will often have to pay higher premiums for surety bonds.
Liability
So, what is a surety bond? A bond acts like insurance for your business. In exchange for coverage, you pay a monthly premium to cover your liability in case of an incident covered by the policy. A bond signals to customers and governing agencies that you’re licensed to conduct business and financially responsible for any incidents the bond covers.
If you don’t have a bond and a claim filed against you, you may be forced to settle the claims out of pocket. This could cost your business money, cause you to lose a professional license, or even void contracts.
A bond is a three-party agreement between the individual purchasing the bond (the principal), the company that requires the bond (the obligee), and the surety agency that sells the bond. When a claim is filed, the issuing surety company must pay valid claims up to the bond’s legal terms. The principal must reimburse the surety company for all amounts paid.
Damage to Your Reputation
It is a request many risk professionals dread hearing: “We need you to be bonded on this project.” A bond claim can damage a company’s reputation, not unlike an insurance claim. It can also result in a loss of professional licenses and canceled contracts.
The difference is that an insurance company expects losses on its policies and seeks restitution from the insured; a surety bond works differently. The bond is written on the principal’s behalf by the surety company, and it puts the economic risk squarely on the shoulders of the bonded principal.
The only way to minimize that risk is to build a strong relationship with a reputable surety agency with experts in each industry. A firm that knows your business and its unique risks can accurately assess your potential claims risks and prequalify you for the best possible premiums. This can save you thousands of dollars in the long run.
Settlement Costs
A surety bond costs you a percentage of the total bond amount required by law to be posted. While these rates differ depending on the type of bond you need, they are typically more affordable than lines of credit and help free up liquidity.
Surety providers review work history and financial records during underwriting to determine your reliability. Those with higher financial stability and better credit scores pay lower fees for their bonds.
When your bond is due for renewal, the surety provider will again run a credit check to see if your standing has changed and may increase or decrease the premium you pay. This is similar to insurance companies charging more for houses closer to the ocean. Steady increases in your credit score can lower your bond cost over time, so it’s worth improving if you need a new bond.
Damage to the Obligee’s Property
Bonds help protect businesses and their clients by assuring financial security. In addition, they increase credibility and trust, which may lead to cost savings.
The underwriting process of a surety bond is often a valuable tool to identify potential risks and opportunities for improvement in a company’s operations. This often translates to increased chances of winning contracts and reduced costs in the long run.
When it comes to the cost of a surety bond, the amount depends on several factors. The most important is the principal’s credit history and industry. A good record makes getting a low rate and securing a bond easier. Conversely, a bad one means higher premiums. It also makes it more challenging to obtain a new bond and can even prevent a bonded principal from returning to their business or profession until they have paid off a claim payout. This is why it’s always best to settle claims as soon as possible.
