Surety bonds are obtained every day by millions of businesses and individuals around the world, all for different reasons. Whether you need one for a construction project or you need it in order to be licensed in a particular industry, you probably clicked on this article because you’ve just been told to get a surety bond but you’re not quite sure how to get one. And what is a surety bond, anyway?
In the business scene, surety bonds are obtained for there to be a guarantee that the business owner—otherwise known as the principal—will follow through their agreement with their customers (also known as the obligees). This agreement could be a completion of a project, such as construction of a building, or payment that has to be made all at a certain deadline.
A surety bond is also a unique kind of insurance as it involves three parties in a contract. This contract is among the surety, principal, and the obligee, wherein the assets or investment of the principal will act as collateral in order to support the requirements of the surety agency. Government projects such as the construction of roads or bridges given to a contractor is one common example of a situation needing a surety bond. In this case, the government is the obligee while the contractor is the principal that needs to complete the project on time. If ever the contractor fails to do so, the surety would then resolve the dispute by paying for the accomplishment of the project or hiring another person to perform the act.
In this sense, another purpose of the surety bond is to protect the obligee or owner of the project from any losses that will come with the failure on the contractor or principal’s part. Since the contractor is expected to reimburse the surety for their expenses, it will come as no surprise that they will be motivated to perform their duties in the most efficient way possible.
A claim can only be made by the obligee or project owner. However, keep in mind the contract must be precise on the kind of work to be performed and the deadline, or else, the principal or contractor can interpret it in different ways.
Know the kind of bond you need
Now that we’ve tackled what a surety bond is and why it’s needed, keep in mind there are different variations of its purpose and meaning as there are different bond requirements in the field. Thus, a good way to start the process of acquiring a bond is to find out which kind you need. Otherwise, there’s a good chance the obligee will just reject it.
The typical surety bond is one referred to as a contract bond, which has been discussed above. As explained, this kind of bond guarantees the contractors to finish the construction projects by a set of detailed description of the design, materials, and deadline, along with a promise of paying subcontractors and suppliers diligently. This does not only refer to government construction projects, but also other private construction companies. Other types of surety bonds pledge to pay financial responsibilities or tax, while others may provide the requirements for local or state licensing and permit for your business.
Once you’re told of your need to be bonded, it’s a good idea to start your research about the bond requirement you must get and then contact a surety agency that can help you shed some light on the various requirements. They can also aid you in contacting surety bond companies once you are knowledgeable on the particular bond you need. Moreover, they can then continuously guide you in the process of eventually acquiring one.
Bond application
So now you’re done with the first step. You now have a considerable amount of knowledge on the type of surety bond you need plus you were able to contact and connect with the right surety agency for you. The next step then is to simply go through the bond application process to get approved.
While it might be challenging to obtain a contract bond as it would need strong financial statements and personal credit, getting a business licensed might be easier to accomplish; it even has a higher success rate since it would only need the owner’s personal credit and is open to all types of applicants.
Nevertheless, in this part of the application, all applicants are obliged to know basic and essential information on the business involved and its owners. You must be able to supply employer identification numbers, occupational license numbers, and social security numbers—all for the purpose of your personal credit and business credit history to be reviewed. In connection to this, other financial documents might also be asked from you. If rejected on the first try, keep looking for more bond agencies that might help you with accessing the right type of bonding programs for your needs.
One strategy that might help strengthen your application is to use a collateral or co-signers. For collateral, you could use cash or an immutable letter of credit from your bank that can be immediately used once a claim will be made. This makes your application more likely to get approved or even just to get a lower premium.
After submitting your application, it would first be reviewed and assigned a corresponding premium depending on your surety company’s rate filings, which will then be paid once you receive final approval for your bond in the appointed term. Although it depends on your surety agency, applicants will usually need to provide payment upfront for a year’s worth of coverage, which is equal to your annual premium. You would also have to complete the signing of the indemnity contract between you and the surety company. Once you’ve completed these two steps, your bond would finally be on the way to be sent to you directly! However, before sending it to the obligee, you as the principal or business owner would have to sign the original copy as part of your requirement.
Cost of getting bonded
Starting a new business could be exciting and at the same time intimidating, therefore, to avoid any serious mishaps, it is important that you as the owner would be able to start determining and setting aside possible start-up costs that must include surety bond costs. You can do your research and ask for a free quote before getting into the actual application. As prices may change considerably over time or among surety companies, there is a risk of not being able to ready yourself with proper resources if ever you underestimate surety bond expenses.
Since your application would be thoroughly reviewed, keep in mind this would also include your financial assets or abilities in the form of your financial statements, along with significant experiences in the industry. However, it is said the most important thing would be the business owner’s personal credit history.
Considering that studies have found a relationship between a person’s trustworthiness with money based on their credit history and a claim activity against a bond in the future, it is no wonder surety companies have taken this part of the application seriously. In simpler terms, one of the responsibilities of surety companies is to assess the possible tendency of a business owner to set off a claim activity. The higher the perceived danger, the higher the bond premium to be required, and vice versa.
High bond premiums may also depend on the surety company’s different high-risk programs they have access to, which may vary between 4 to 15% of the bond amount. On the other hand, low-risk applicants are more likely to acquire an annual premium ranging between 1 to 3% of your bond amount, which is the standard market rate.
How long do you have to wait?
As an applicant, once you are prepared, the surety bond application process is fairly easy and quick. Surety companies typically require you to complete a simple application form, while others can even let their applicants fill up online. This only takes a few minutes and since the system automatically allows speedy pricing and approvals, you may be accepted within the day and have your bond delivered the day after. When additional information may be asked, it can be usually done through electronic means.
In fact, sending your bond to the obligee may take an even longer time than the application process itself if they require actual submission of bond and documents in person.
In conclusion, the thought of applying for a surety bond may be quite daunting at first especially if you know nothing about this kind of process. However, once you have educated yourself on the kind of surety bond that is required of your business and are ready with important documents, acquiring one is definitely something easy to achieve.
Guest post courtesy of Brenda Powers
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