How do you go about securing a surety bond?
As the question implies, everyone has their own ideas on how they should go about searching for a surety bond. Some will search the internet for “surety bonds” or “commercial bonds” while others may ask around with friends or family members to see if they have any recommendations of where to research.
Then there are some who choose which company they are going to apply to by names alone believing that if one is good then all must be great. The truth of the matter is that none of these methods are advisable and it is likely that the individual looking into securing a bond ends up applying with more than one company after hearing what each presented as their solution. This becomes an expensive proposition that can be prevented by performing some thorough research.
What factors go into determining the amount of a surety bond?
A surety bond is a general contract between three parties: the principal, the obligee or entity that has been promised payment–and the surety. The three parties determine whether or not to guarantee someone’s debt or duty to another party and then enter into an enforceable contract that details each person’s responsibilities.
In most cases, the obligation being guaranteed is an agreement between two companies to complete specific tasks, such as installing new equipment at a customer site. Because surety bonds are contracts, their terms and conditions will be determined by all three parties involved. Though not a legal requirement for a company needing financing in order to grow its business, it makes sense for both an applicant and the potential surety to discuss what is needed prior to signing any contract.
What should the amount of my surety bond be?
Before posting the required surety bond, one must first properly choose how much insurance they need. The amount of the bond that an applicant is required to post will be determined by various things such as the name of the insured business itself, any prior violations committed within a certain time frame, and any applicable fines/penalties.
Typically, more insurance is needed for businesses dealing with more valuable commodities or having a larger volume of transactions. For example, if an applicant were applying for a liquor license which costs around $15k on average they would need roughly 10% of their total yearly liquor sales up to $1 million in coverage (or $100k). That would cover them in case something happened during transportation where their alcohol was stolen or otherwise lost/damaged.
What steps do I need to take to create my own surety bond?
When you decide to open up a new business, there are many forms and documents that need to be filled out. One of the most important is the surety bond application, which needs to be taken care of before you can begin operating your business. Here’s what you need to know about applying for your business’ surety bond:
- Get an Agent – The first step in getting a surety bond is finding an insurance agent or company that will represent your business.
- Fill Out All Necessary Paperwork – The next step in obtaining a business surety bond is filling out all of the necessary paperwork with your agent. You can usually find an application on their website that you will need to fill out and return before they begin processing your request.
- Get Your Credit Report – In order for a company or agent to determine whether or not you are approved for a surety bond, they must first run a credit check on your business.
- Sign Your Contract – Once it has been determined that you are eligible to receive a business surety bond, the agent or company that is covering your liability will create a contract that needs to be signed by both parties before any money can be exchanged.
- Get Your Bond – In order for your business to operate on an everyday basis while waiting for your documents to be processed, some insurance companies will provide a limited-use letter of credit until your surety bond is approved and issued.
Once your surety bond has been issued by the insurance company, then you can begin operating as usual and no longer need to worry about whether or not this letter will expire. As long as you abide by the contract and pay on time each month, there should never be any problems with continuing to use this surety bond for your business.
Are surety bonds paid on a yearly basis?
Today, surety bonds almost always payout on an annual basis. Of course, this is not a hard and fast rule as the terms of the bond agreement will vary from company to company. For instance, a construction company might be concerned about a contractor finishing a project by a particular date.
In that case, the bond payment may only cover those months necessary for the completion or it could be paid out in one lump sum upon successful completion of all contracted work. No matter what arrangement you make with your surety provider, however, you should know what actions can cause forfeiture during non-work periods.