The Cost of Surety Bond: What You Need to Know

A surety bond is a financial tool used to guarantee the performance of a contractor or business. It provides assurance to the obligee that the contractor or business will fulfill their obligations as stated in the contract. The cost of a surety bond can vary greatly, and it's important to understand the factors that determine its pricing.

In this blog, we'll dive into what a surety bond is, how it's priced, and what you can do to minimize the cost of obtaining one. Whether you're a contractor, business owner, or simply interested in the topic, this guide will provide valuable insights into the world of surety bonds.

What is a surety bond?

On the desktop there are reports, notepads, a calculator, a cash and a yellow sticker with the text SURETY BOND.

A surety bond is a type of financial agreement that provides a guarantee of performance or payment for a project or service. It is a tripartite agreement between the principal (the person or business obligated to perform), the obligee (the entity requiring the bond), and the surety (the company providing the bond).

The surety bond protects the obligee from financial loss in the event that the principal fails to fulfill their obligations as stated in the contract. If the principal breaches the terms of the contract, the obligee can make a claim on the bond, and the surety will step in to cover the costs.

How does a surety bond work?

Surety bonds work by transferring the risk of financial loss from the obligee to the surety in the event that the principal fails to fulfill their obligations. The surety steps in and pays out a predetermined amount to cover any losses or damages incurred by the obligee.

Types of Surety Bonds

There are three types of surety bonds: commercial surety bonds, contract surety bonds, and court surety bonds.

Here is a more in-depth look at each type:

Commercial Surety Bonds

These are usually used for businesses and contractors to guarantee the performance of a contract. Examples include bid bonds, payment bonds, and performance bonds. Additionally, they can also be used for licensing and permitting purposes.

Contract Surety Bonds

These are typically used by governments to guarantee the compliance of a contract between two or more parties. Examples include bid bonds, performance bonds, payment bonds, maintenance bonds, and supply bonds.

Court Surety Bonds

These are used in court proceedings to guarantee the performance of a contract, payment of a debt owed, or other legal obligations. They can also be used to secure the release of someone from jail before trial. Examples include appeal bonds, probate bonds, and replevin bonds.

What is the average cost of a surety bond?

On the dollars is a wooden plate with the inscription - SURETY BOND

The cost of a surety bond depends on several factors, including:

  • The size of the bond

  • The type of bond (contractor or commercial)

  • The creditworthiness of the principal

  • The obligee's requirements

  • Any additional risks associated with the project.

Generally, surety bonds cost between 1-15% of the total amount being bonded. For example, if the total bond amount is $50,000, the surety bond cost would be between $500 and $7,500.

Factors That Affect Your Surety Bond Rate

You may be required to purchase surety bonds for various reasons as a business owner. Surety bonds are insurance used to protect customers from harm, such as nonperformance of contracted services or financial loss due to fraud. Before purchasing one, one must know the factors that affect your surety bond rate.

Here are some of those factors:

Your credit score

One of the most critical factors that affect your surety bond rate is your credit score. Your credit score reflects the trustworthiness and financial stability of your business, so it indicates how likely you are to fulfill your obligations. Businesses with higher credit scores will typically have access to lower surety bond rates compared to businesses with lower ratings.

Industry risks and type of surety bond

The industry you’re in, and the type of surety bond you need to purchase will also affect your rate. Some industries involve more risk than others, so they may require higher premiums to protect against those risks. Similarly, different types of surety bonds often come with their premiums, so it’s essential to research the type of bond you need and how much it will cost.

Your location

Where your business is located can also affect your surety bond rate. The region or country in which you operate impacts the risk associated with offering services within that area. The surety bond rate may be higher or lower depending on the state or country you’re in.

Size of the bond

The size of the surety bond can also affect your rate. Generally, the larger the value of a surety bond is, the higher its cost will be. As such, it is essential to determine how much surety coverage you need and the associated cost.

When looking for surety bonds, it is essential to understand the factors that can affect your bond rate. Knowing these factors will help you choose a suitable bond with an appropriate rate for your business.

How is the Bond Cost Calculated?

Surety bonds are a form of financial guarantee required for many types of businesses in the United States. The cost of a surety bond is determined by several factors, including credit history and score, business credit and experience, licensing history, and moral character. Each of these components will be discussed in detail below.

1. Credit History and Score

report credit score banking application risk form document

Before a surety company provides a bond, they will check any applicants' credit history and score. The higher an applicant’s credit score, the lower their bond cost will typically be. Those with poor or no credit may still qualify for a bond but at a significantly higher cost than someone with excellent credit.

2. Business Credit and Experience

In addition to an individual's credit score, surety companies also consider the applicant’s business credit and experience. A bond provider will want to know how long the business has been in operation, what type of assets it holds, and it is overall financial standing. The more established a business is, the more likely they will receive a lower rate on its surety bond.

3. Licensing History

The licensing history of an applicant also plays a role in determining the cost of a surety bond. If there are past problems with a contractor’s license, such as unresolved disputes or violations, it may lead to higher costs or even denial of the bond application.

4. Moral Character

Finally, surety companies will review applicants' moral character before providing them with a bond. The provider wants to ensure that their clients follow all applicable laws and regulations and conduct business ethically. Those with high moral standards are more likely to receive lower rates for their bonds than those who do not meet these expectations.

Who Sets the Price of Surety Bonds?

The cost of surety bonds is determined by the surety bond company. These companies typically consider a few factors when determining the rate for a particular bond, including:

  • The principal's credit score and financial history—the better their credit score and financial history, the lower their bond premium;

  • The type of bond required—some bonds are more expensive than others;

  • The amount of coverage requested—larger amounts require larger premiums;

  • Where the bond is located—rates in certain states or regions may be higher than others due to risk factors or other considerations.

In some cases, it may also be possible to negotiate with the surety company for a lower rate on the bond. It's important to shop around and compare rates from different surety bond companies before making a decision.

No matter what, it is always best to purchase your surety bond through an experienced and licensed bonding agent who can help you navigate the process and make sure you get the best rate possible.

We at Hotchkiss Insurance, provide professional, experienced, and knowledgeable bonding agents that can assist you in understanding the surety bond process. Contact us today for a free quote on your surety bond needs.

Is the Bond Amount the Same as the Bond Cost?

Word bonds at wooden letters on US Dollar bills

No, the bond amount is not the same as the bond cost. The bond amount is usually much more significant than the actual cost of the bond, and it serves as security for any potential claims that may be made against it. The bond cost is simply a fee the surety company charges for issuing the bond.

The premium rates for surety bonds vary depending on various factors and can range from 1-15% of the total bond amount. It's important to note that this percentage rate does not reflect an annualized rate; instead, it represents a one-time payment that must be paid in full before receiving your surety bond.

Do you pay surety bonds monthly?

No, surety bonds are not typically paid every month. Instead, the full premium payment is due upfront before receiving your surety bond. This means that you will need to have sufficient funds available to purchase the bond.

The cost of surety bonds can vary widely depending on the type, and amount of coverage requested, as well as other factors such as credit score and financial history. It's important to shop around and compare rates from different surety companies before deciding.

Can You Get a Surety Bond with Bad Credit?

In most cases, you can still get a surety bond with bad credit; however, the premium rate will likely be much higher than if you had good credit. Surety companies consider credit score and financial history when determining the rate for a particular bond.

If your credit score is not ideal, it's important to work on improving it before applying for surety bonds. This can involve paying down debts, being mindful of spending habits and making timely payments on all accounts. It may also benefit you to contact creditors and ask them to update the payment status of any negative accounts to show that they are paid in full or current.

Once your credit score has been improved, you may be able to qualify for better rates on surety bonds.

Are Surety Bond Premiums More Expensive for New Businesses or Bad Credit?

Bad credit surety bonds can be more expensive than regular bonds due to the additional risk associated with insuring someone who has a low credit score. The premium rate for bad credit surety bonds can range from 4-15%, depending on the type of bond, amount of coverage requested, and other factors.

New businesses may also pay more for their surety bond premiums since they lack an established financial history or track record. Surety companies consider various factors, such as the length of business, financial stability, and cash flow, when determining rates for new businesses. Generally speaking, newer businesses will be charged higher premiums than those with a longer track record of success.

It's essential to shop around and compare rates from different surety companies before deciding which one to use.

Will the Surety Bond Cost Change at Renewal?

It can be slightly more expensive to renew a surety bond due to inflation or changes in the market. Surety companies may adjust their rates if they perceive any additional risk associated with the bond.

Moreover, the surety bond cost may increase if the requested coverage increases.

It's essential to keep track of your surety bond expiration date and shop around for quotes before renewing to ensure you get the best rate available.

Secure Surety Bonds Today!

To conclude, surety bonds are essential for businesses to protect themselves from financial loss due to mismanagement or negligence. They can be expensive, especially for new businesses or those with bad credit. It's essential to shop around and compare rates from different surety companies before deciding which one to use for your business needs. Secure surety bonds today and protect your business from potential losses!

At Hotchkiss Insurance, we provide surety bonds for businesses of all types and sizes. We understand that finding the proper surety bond can be complicated, so our mission is to provide you with the best rates available and the most comprehensive coverage. Contact us today to learn more about our services and how we can help.

We look forward to working with you!