What Affects the Cost of Surety Bonds

by Eric Weisbrot

Several professions require the purchase of a surety bond to help protect customers from financial loss. While surety bonds a common component of operating a successful and legitimate business, not everyone understands what impacts the cost of a bond or how to go about getting one.

Whether you are a licensed contractor, auto dealer, or mortgage broker, you need to know how surety bond pricing works and the factors that influence its cost.

How Surety Bonds are Priced

A surety bond is meant to provide some financial protection to customers of certain industry professionals. Unlike insurance, a claim against a bond is paid directly to the bond owner’s customer, not the bond owner himself. For this coverage, a surety agency requires a percentage of the bond amount to be paid as the premium. In most cases, the price of a surety bond ranges from 1% to 10% of the total bond amount. Because of this pricing structure, surety bond costs depend heavily on the amount of the bond requested.

Factors that Influence the Cost

In addition to the bond amount dictating the cost, surety bond prices are influenced by other factors as well. These include the following:

Your personal credit – a surety bond is a form of credit extended to you which you must repay if a claim is made against your bond. For this reason, your personal credit history and score drives the bond price. If you have less than perfect credit due to late payments, bankruptcies, or court judgments against you, the percentage of the bond amount you pay will be higher than someone who has strong credit.

Your industry – surety bonds are a required part of the licensing process for many professionals. However, the type of work you do and the location of that work drive the cost of your bond. For instance, licensed construction contractors may require a surety bond for residential work, but most must have a bond in place for commercial projects. The state or city where the work is performed will have guidelines on how much of a bond is required – this dictates the price.

Your claims history – if you have had a surety bond in the past and customers have successfully claimed against it, the price you pay for your bond will likely be higher than a claims-free bondholder. Surety agencies view past claims history as an indicator of risk, and the more claims you have, the higher the risk you pose to the agency.

Your business history – if you’re just getting starting in a new industry or starting your own business, a surety bond may be more expensive. This is because the surety agency doesn’t have much to go on as far as evaluating your character, your track record of working with customers or clients, or your business financials. You may be viewed as a higher risk because of a minimal business history, but this does not exclude you from getting the surety bond you need. It simply means your first bond price may be higher than other industry professionals.

Getting an Affordable Bond

Although the cost of a surety bond varies greatly from one person to the next, you are able to get an affordable bond by preparing in advance. Working to clean up your credit before applying for a new surety bond helps tremendously, as does having your personal and business records organized and accurate. You should also be sure to work with a surety agency that partners with several different bond providers who offer programs for individuals with bad credit or a frequent claims history. Taking these small steps can help you get the bond you need for your business both now and in the future.

About the Author: Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

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