Surety bonds are a required part of doing business across many different industries, from construction and auto dealerships, to mortgage brokers and money transmitters. Having a surety bond in place not only fulfills licensing requirements in several states, but it also offers protection for consumers. When a claim is made against a surety bond, the agency providing the bond pays the claim on behalf of the business owner or professional to the customer. This type of protection is not offered through traditional insurance policies, making it a crucial part of running a successful, legal business.
While surety bonds offer unique protections, they are an added expense that businesses must plan for in advance. Fortunately, there are several steps business owners and industry professionals can take to ensure the cost of a surety bond is not unnecessarily high.
Know How Bond Pricing Works
Certain factors play a role in the cost of a surety bond, including the following:
- The type of bond needed for business licensing or a specific project
- The amount of the surety bond in place
- The personal credit of the bondholder
- The financial strength of the business
Surety agencies offering bonds rely on an evaluation of these factors to determine the price for a new or renewed bond. Most surety bonds cost a percentage of the total bond amount, ranging from 1 to 10%, with the percentage heavily influenced by the details provided by the bond applicant. When the factors mentioned are not positive for an applicant, the percentage paid is higher. Understanding this pricing model will prepare businesses and individuals for the potential cost of their next surety bond.
Review Your Credit
Surety bonds are a form of credit extended to an individual or business. A successful claim against a bond is paid out by the surety agency initially, but the bondholder is required to repay the claim amount over time. Because of this structure, personal credit plays a role in surety bond pricing.
If a bond applicant has had poor credit in the past, including negative items like late payments, bankruptcy, foreclosure, or court judgments, a surety agency is likely to charge more for a new bond. Good credit can help reduce the cost of a bond, so it is beneficial for bondholders to ensure their financial track record is clear of errors or negative marks before applying.
Organize Business Financial Documents
Another way to reduce surety bond costs is to organize the financial documents of the business. Surety agencies may ask for these details, including a balance sheet, cash flow statement, or income statement as part of the application. If business documents are inaccurate, disorganized, or they simply do not exist, a surety agency may see this as a red flag and ultimately charge more for a new bond. Having these documents ready to provide to a surety agency will help move the process along faster while potentially lowering the price paid for a bond.
Surety agencies want to feel confident that should a bond claim arise, businesses and professionals who hold bonds have the money available to repay the claim amount. Increasing liquidity, also known as cash on hand, can help in this process. For businesses, improving liquidity may mean selling off assets that are no longer needed to put some cash in the bank. It may also mean collecting on outstanding invoices from customers or restructuring short-term debt into long-term obligations to help lower required monthly payments. Having more liquidity can help reduce a bond price as it shows a business if financially prepared for a claim in the future.
Keep Claims to a Minimum
Individuals or businesses who already have surety bonds in place can keep the cost of a renewal low by minimizing claims. This does not mean avoiding customer complaints or issues, but instead working with the customer to understand what may have gone wrong and how it can be remedied without a bond claim. Additionally, bondholders should be careful to take on only the work or projects they feel confident completing successfully. Overextension or lack of skill in a certain area may inadvertently lead to a bond claim that increases the cost of a new bond in the future.
Have a Good Surety Agency
Bond claims are inevitable in many different industries, and they cannot always be avoided. When a bond claim takes place, it is helpful to be partnered with a strong surety agency that can help ease the process or mitigate losses along the way. A good surety agency will provide access to claims professionals who make this happen for bondholders. Also, a good surety agency will work with several different types of bond providers, ensuring bond applicants have access to the most affordable bonds for their specific circumstances.
Maintain Education and Training
Keeping up to date with education and training in a specific industry is also helpful in keeping the cost of a bond low. This is because ongoing improvement of skills helps minimize bond claims while also boosting one’s reputation in the industry. Take the time to expand education and get required training whenever possible throughout the course of your career.
The combination of these steps will help reduce the cost of a surety bond for nearly all professionals and business owners who need a bond in place.