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Contractor Bonding FAQ

Common Contractor Bonding Questions

What is A Surety Bond?
In simple terms, a surety bond is a guarantee. It is a form of credit, not insurance. What the bond guarantees varies depending on the type of bond. A surety bond is a contract among at least three parties.

The Principal – (The Contractor)
The primary party who will be performing a contractual obligation.

The Obligee – (Typically a  Municipality or State)
This is the entity requiring the bond . For a Contractor License Bond the obligee is the State licensing authority.

The Surety – (The Bonding Company)
The company that ensures the principal’s obligations will be performed.

A surety bond is an agreement by the surety to uphold the contractual promises (obligations) made by the principal if the principal fails to uphold his promises to the obligee. The surety bond is a form of consumer protection, serving as a line of credit to cover any damages incurred by breach of contract between the principal and the obligee.

 

How Do Surety Bonds Work?
To get a surety bond, you pay a percentage of the bond amount called premium. Once the premium is paid, the surety extends “surety credit” and establishes the required guarantee, the bond. A claim can arise if you do not abide by the terms of the bond. In the event of a claim, the surety will investigate to ensure the claim against the bond is valid. If the claim is valid, the surety will look to you for payment of the claim and any associated legal fees.

 

How Do I Get a Surety Bond?
You must start with an application. We usually get same day approvals but the process on more complicated bonds can take up to 5 business days. Upon approval of your application you will receive a price and an agreement between you and the surety company. The bond is then issued 1-2 business days from receipt of payment and the agreement.

 

How Much Does a Surety Bond Cost?
Surety bond premiums are based on credit scores, so the amount you pay for a bond is based on your personal credit. Generally speaking, the cost of a bond for good credit is about 1-3% of the total bond amount. For” less than perfect” credit scores premiums start around 7.5% of the bond amount. Premiums vary dramatically from surety to surety, so we work with several of the top surety companies to ensure you are getting the most affordable option based on your unique credit situation.

 

Why Does My Credit Score Matter?
The Surety company needs to access your ability to pay repay debt because they are responsible for paying the claim if something goes wrong, like valid claim filed on your bond. The surety is financially backing you as a contractor, so your credit score and history gives them a way to gauge your ability to come up with potentially large sums of money.

 

Why Should I Get A Bond if I Have to Repay Claims?
A surety bond is a form of credit where you are responsible to pay back any claims against the bond. The alternative to a surety bond is to post cash or a letter of credit. Surety bonds are advantageous because they  help preserve cash flow typically require no collateral. In addition, bond premiums are similar to fees for letters of credit and usually easier to get.

 

Please call us with additional questions at 866.376.2510, our team is standing by.