In certain business industries surety bonds are required by the government. These bonds serve as a form of insurance for the customer and can act as a line of credit for the business. If you default on a business contract the bond will pay a lump sum to the customer. However, there are a number of facts that you need to know about surety bonds and how they work.
Surety Bonds Are Not Insurance
Many people confuse the use of surety bonds and insurance, but they are not the same thing. As part of your licensing requirements, you may have to get insurance, but you should not mistake this as a surety bond even when they are sold by the same company. The difference is that insurance compensates the policyholder while a surety bond does not protect the person who has bought the bond.
Surety Bonds Are A Three-Party Agreement
It is important that you understand what you are signing when you get bonded. Most surety bonds are a three-part agreement with the obligee, the principle and a surety. The obligee will be the part that requires the bond which is commonly a state agency. The principle is the party purchasing the bond which will be you and the surety is the company that has authorized the bonds.
When the surety gives you a bind they are guaranteeing the obligee that you will abode by the regulations and terms of the bond. You will be asked to sign an agreement which states that you are legally responsible for claims that are filed against you. If a claim is filed against you the bond company pays the customer and you will have to repay the bond company.
Surety Bonds Are Like A Line Of Credit
The pricing of the bond is one of the most frequently asked questions related to these bonds. Your credit score will determine how high your quote is going to be. This is due to the surety bond working in a similar manner to a credit line. The surety company will look into your credit history to determine whether or not they are willing to give you a bond and what the terms are going to be.
When applying for a loan with poor credit scores you will be faced with high interest and a surety bond works in the same way. If your credit score is low the premium on the bond can skyrocket to as much as 15% of the total amount of the bond. There are also cases where you may not be given a bond because of a poor credit score.
It Is Not All About Credit Score
While the credit score does play a large role, it is not the only thing that does. There are some simple things that you can do to get your bonding costs lower including educating yourself from hcgms.org. The first thing you should do is pay all of your outstanding tax lines, civil judgment and collections. If you are able to show strong financial statements for your business and you personally then you could reduce the surety bond costs.