What is a commercial surety bond?
A commercial surety bond is a contract between a company and another party. The contractor provides the required security against the failure of their contractual duties, generally in the form of a payment or performance bond. These bonds can be used to encourage people to do business with you by protecting them from financial loss should you fail to complete your tasks.
Commercial surety bonds are most often used in the construction industry, but they can also be required for subcontractors involved with federal contracts. The following are just some instances where a contractor may need to procure a bond: government projects, sale or lease of real estate, contract performance, small business contracts/agreements, and licensing.
When purchasing a commercial surety bond there are several factors you should consider before making your decision including underwriting requirements, type of contract/undertaking being bonded, indemnity amounts, premium rates, agency relationships, and financial strength ratings. Make certain you review all relevant information prior to making a decision and compare several different companies before committing.
What types of commercial surety bonds are there?
There are three basic types of commercial surety bonds: performance, payment, and maintenance. These different kinds of contracts require specific bonds that vary based on the nature of the work being done or services being rendered.
A performance bond ensures that you will complete your contractual obligations while a payment bond guarantees that you will be paid for the work you have completed. A maintenance bond is similar to a performance bond, however, it’s typically used in relation to smaller contracts and ensures that both parties live up to their contractual agreements.
You can never predict exactly what will happen in your business so it’s important to prepare accordingly. Implementing a strong commercial surety bond is one of the best ways to protect yourself from financial losses as well as other legal obligations that may arise. Take the time to research these different agreements and choose a reputable agency that you fully trust with all relevant information before making a final decision.
How much does a commercial surety bond cost?
Premium rates for these different types of bonds can range from 1% – 30% depending on the type of contract, amount of the bond, and financial strength ratings.
The premium rates can also depend upon whether you’re applying for individual or multiple bonds under one application. Compare several companies to find the best deal possible and make certain you fully understand all relevant obligations before signing your commercial surety bond agreement.
What are the underwriting requirements for commercial surety bonds?
The underwriting process is similar to applying for a loan and the guidelines vary from one agency to another. When purchasing your bond make certain you thoroughly review all of these requirements before submitting your application as they can vary depending upon the nature of your contract as well as the insurance company. These requirements usually include:
- Identity verification (i.e. SSN, DOB)
- Most recent personal and business financial statements
- Business history and composition (i.e. number of employees, amount of revenue/sales, etc.)
- Personal credit score and FICO score
Other factors can also affect your eligibility such as or tax liens so be sure to research and understand all relevant underwriting criteria to ensure you qualify.
It’s important to work with experienced professionals who can help guide you through this process so you understand all of the necessary details including what is required by law in your state.
What is the process for obtaining a commercial surety bond?
The procurement of commercial surety bonds can vary depending on the company you’re working with and your specific requirements. Generally, there are four different steps involved: application, underwriting review/approval, bond issuance, and payment of premium. Your chosen agency will guide you through this process making it as easy and hassle-free as possible so you can secure the relevant agreement in a timely manner.
Unfortunately, there are instances where agencies fail to meet their contractual obligations and have to close their doors. If the bond you’re working with is a performance bond and they failed to perform on your contract it’s important that you take action within 60 days of the date of default to file a claim in court. Many people who worked with this company may be affected by this closure so it’s recommended that you seek legal counsel if you lost money because of this incident.
If you’ve lost track of your commercial surety bond agency and they have gone out of business, it’s important that you find a new provider as soon as possible. The company should work with you to help transition all relevant agreements so you’re not negatively impacted by the closure in any way. Be certain to research numerous different companies before moving forward and don’t commit to anything without fully understanding all requirements.