Understanding Surety Bonds

Webster's dictionary defines a surety bond as - "A bond given to protect the recipient against loss in case the terms of a contract are not filled." In most cases the surety company will evaluate your credit, work experience, and financial stability. This information is gathered in an effort to help them determine what type of risk you are, and what type of rate they should charge you for your bond.

The process is very similar to applying for a business loan, and the rates will usually be based on a multitude of conditions. For instance one item that is looked at on a regular basis is the State in which you live. This will also determine what type of surety bond is needed. Other factors taken into consideration are the financial outlook of the company or individual, the amount of experience in the industry, and the surety company that is actually writing the bond.

Credit scores also play an important factor and, most companies will look for a credit score above a 670. They will also require that you have no public records, collections, or slow pays. In addition to this, they will also review your business financials to make sure that your company has a positive net income and worth. The surety company may also require that financial equity be at least five times the bond amount. For example, if you were going to apply for a $50,000 Surety bond, the insuring company would be looking for a net worth above $200,000.

However, these numbers can vary across the board and, are normally determined by the State and the type of bond. The main reason for this is because some types of bonds have a higher loss ratio than other types of bonds. Remember that there is also an added risk with these types of bonds, and the company wants to make sure that you are going to be able to pay a claim if one occurs.

If you are able to meet these minimum requirements, and the type of surety bond is not considered hazardous, then you should be able to qualify for a preferred rate of 1% to 3% of the surety bond amount. Most surety bonds on the market today will have a minimum premium for their bond, which will usually be around $150.00 to $250.00. However, you should not normally expect to run into this problem unless your bond amount is under $25,000.

You must be mindful of the fact that not every person or company will be able to meet the surety bond requirements for preferred rates, if they are able to qualify for bonding at all. This is due to the recent tightening of restrictions, and the recent influx of claims. As a direct result of this, many Surety Companies will either require that you put down some form of collateral or simply decline your application.

The good news is that there are still programs that will not decline your bond due to credit or other conditions, however they will charge you a higher rate due to the added risk factor.