Surety bonds cost

A surety bond guarantees that your customer will receive reimbursement if your business fails to fulfill your contractual obligations.

Surety bond prices vary widely based on the type of bond, its size, and other variables. Premiums can range anywhere from 1% to 15% of the total bond amount. This amount is typically paid each year.

For example, a company that takes out a $100,000 bond could pay anywhere from $500 to $10,000 annually, depending on a variety of factors. A company with a $10,000 bond could pay up to $1,000 for its bond, or as little as $50 per year.

Most small business owners buy bonds of $50,000 or less and pay the minimum premium, which is often $100 annually.

Clients (also called the obligee) may require proof of a surety bond before signing a contract with your small business (called the principal). It also may be required by state law or to obtain a license.

The price of a surety bond is calculated as a fraction of the bond amount, with several other factors taken into consideration.

When determining your bond premium, your insurance provider will look at:

• Financial history and credit score
• Bond size
• Business size
• Industry risks
• Years of experience
• Claims history
• State laws
• Bond type

A surety bond is more similar to a line of credit than an insurance policy. The money must be paid back if you use it. That's why your credit profile and financial strength are important.

As part of the bonding process, the surety company's underwriters will look at the applicant's personal credit score, business financial statements, and other relevant information to determine their premium rate. For applicants with strong credit, bonds usually cost between 1% and 3.5% of the total bond amount.

If you have a bad credit rating, you can probably still get a bond. However, you will have a higher premium than those with average or above-average credit. Having a good credit score helps keep costs low, as it shows the surety bond company they can count on you to pay back the amount if needed.

The only exception is a fidelity bond, which does not require the business owner to repay the bonding company. This specific type of surety bond resembles a standard commercial insurance policy.

In general, the premium you pay for a commercial bond primarily depends on the bond amount, also called the penal sum. However, insurers won't issue a bond for less than a certain amount, typically around $100. This is called the minimum premium.

For example, a bonding company might decide to charge you a 1% annual premium for a surety bond due to good credit. This table outlines the range of prices a business owner might pay for a surety bond based on its size, your credit rating, and other factors:

Larger businesses with more employees, revenue, and assets often pay more for surety bonds than smaller businesses. They often need bigger bonds, and underwriters assume that larger businesses have an increased risk of claims.

For example, a wholesaler with many warehouses, employees, and vehicles is likely going to pay more for a bond than a similar type of business with a single building. In addition, the cost of some bonds, such as janitorial bonds, directly depends on the number of employees.

Your industry's risk level can impact the overall bond price. Businesses in riskier industries often need bigger bonds and may get charged a higher percentage of the bond amount.

Examples of industry-specific surety bonds include:

• Construction bonds
• Janitorial bonds
• Real estate or mortgage broker bonds
• Wholesaler bonds
• Notary bonds
• Freight broker bonds
• Motor vehicle dealer bonds

Higher-risk businesses, such as construction companies and auto dealers, may have to pay a higher percentage of the surety bond amount (for example, 10% or more) as a premium. Surety bond rates for a lower-risk business could be as little as 1% of the bond's value.

A business might be considered high risk when the bond guarantees the completion of a high-stakes project, such as a multi-story commercial building. On the other hand, a company that does house cleaning might be considered low risk and only needs a small bond, which would result in a smaller premium.

The longer your business has been in operation, the lower your surety bond premiums are likely to be. Well-established businesses with a proven track record and industry experience often pay lower premiums than newer businesses with an unknown risk profile.

For example, a business that has been in operation for two years is likely to pay more for a surety bond than a business that has been operating for decades. Bond providers assume that newer businesses are riskier in general and more likely to make a claim on their bond.

Previous claims on a bond can impact your surety bond costs. Surety providers often view prior claims as predictors of future claims.

To ensure your business is offered lower premiums in the future, do your best to minimize incidents that can lead to claims. Employee training, detailed contracts, and diligent risk avoidance can all help keep claims to a minimum.

There's a wide range of surety bonds designed to provide different financial guarantees across different industries. The type of bond you'll need depends on your industry and the specific work your business performs.

Even within your profession, you may see several types of surety bonds with varied prices. Here are some of the most common types of bonds:

• License and permit bonds for consumer protection and legal compliance
• Bid bonds for bidding on construction projects
• Performance bonds that guarantee work completion
• Payment bonds that guarantee payment for all involved parties
• Contract bonds for fulfilling the terms of a contract

You can expect to pay more for a high-risk bond, such as a performance bond for a large construction project. License bonds, on the other hand, are often very affordable.

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