Frequently Asked QuestionsWhat is a Surety Bond?
While there are many varieties, a surety bond is essentially an agreement between three parties–a principal, an obligee and a surety–assuring them all that something will happen. In general, surety bonds protect consumers and hiring parties, also known as the obligees, from fraud, abuse and penalties.
The most common surety bonds required in the U.S. fall under the license bond umbrella. These bonds are required to be filed with a federal, state or local business license to ensure that the bonded principal will comply with all rules and regulations mandated per their specific license.
In the construction industry, surety bonds guarantee that the principal, or the contractor hired to do a job, will perform the task as outlined in the official contract. If the principal does not, then the surety, pays the obligee money to get the job done and to cover any damages, penalties or other costs incurred. The principal then repays the surety for this claim.
How Much Does a Surety Bond Cost?
Surety Bond premiums very based on several factors. In general, those applying for a commercial bond will fall into two approval categories: the standard surety bond market, and a high-risk market. Depending on which market you fall in will vary greatly your surety bond cost.
Standard Market Surety Bond Cost
The standard markets for surety bonds are reserved for those with good personal credit, including strong business and personal financials. Any company that cannot provide business financials (new companies) will have to submit resumes of management that show solid industry experience. A rough estimate of the standard market surety bond cost, or premium, would be 1%-4% of the required bonds amount. Please remember that this is a broad range because bonds are underwritten on a case-by-case basis, and therefore premiums can be affected by several factors including your business type and what state you are operating in.
High Risk Surety Bond Costs
The bad credit surety bond market is available for those with poor, or no credit. This program allows these high-risk individuals to be approved by charging a higher premium then the standard market. Applicants with poor credit (a loose rule of thumb is below a 650), bankruptcies, tax liens, unpaid collection, or civil judgments can expect to be placed in the high-risk program. Once again these are very loose guidelines as every applicant is taken on a case-by-case basis.
The cost of a high-risk surety bond will typically vary between 5%-15%, though in rare cases some premiums are as high as 20%
How Long Does it Take to Receive a Bond?
Our team at Twinbrook is committed to helping expedite the process as much as possible, including sending your application to the proper bonding company on the same day it is received.
While some bonds are approved immediately, others can take from one to four business days. After approval, the bonds issuance typically occurs about one to two days after receipt of payment (and any other documents required by the surety for release of bond).
What is the Difference Between Being Bonded and Insured?
With insurance, a person is required to pay an insurance premium to their insurance company which essentially transfers most (if not all) risk from the individual purchasing the insurance to the insurance company. The only similarity between insurance and a surety bond, other than their common root word, is the payment of a premium, because when a person pays a bond premium for a surety bond they (the principal) do not transfer risk to the surety, and instead the payment of claims will fall on the principal's shoulders. When dealing with surety bonds, the protection goes to the person or entity that requires the principal to purchase the bond (the obligee).
When dealing with losses, insurance companies typically expect to make payment for a certain percentage of a given claim. However, surety companies do not expect to make such payments on claims, and instead treat the premiums paid for surety bonds as service charges. The premiums essentially authorize the principal to use the surety's deep pockets for financial backing, which provide the required guarantee.
In summary, the insurance industry is built around the assumption that customers will in fact file claims, and need to use their insurance. In the surety bond industry, claims are not looked at as inevitable, but instead all parties involved do everything in their power to avoid such losses.
What is the Difference Between a License and Contract Bond?
Contract bonds only ensure that work will be completed. They are almost exclusively used for construction contracts, while a wide variety of license bonds–including those that cover car dealerships, freight brokers and health clubs–simply make sure practitioners uphold federal and local laws that protect the consumer from physical and financial harm. As the name implies, no specific contracts for work are signed or needed with license bonds.
What is the Difference Between a Surety Bond and a Bank Letter of Credit?
Performance and payment bonds are usually issued on an unsecured basis and are usually provided on the construction company's financial strength, experience and corporate and personal indemnity. The issuance of bonds does not diminish the contractor's borrowing capacity and may be viewed as a credit enhancement. The bond remains in force for the duration of the contract, plus a maintenance period. Generally the cost of the bond is 0.5% to 2% of the contract price.
Bank Letters of Credit
Specific liquid assets are pledged to secure s bank Line of credit. Bank Lines of credit diminish the contractor's line of credit and appear on the contractor's financial statement as a contingent liability. The Bank Line of Credit is usually date specific, generally one year. The cost is generally 1% of the contract amount covered by the Line of Credit.