What is a Commercial Bond?

Commercial surety bonds act as a guarantee that business owners will act in accordance with regulations set by their state, municipal, or federal government. Business owners must apply for a surety bond and will pay a portion of the total bond amount, known as the bond premium, to a surety company.

In exchange, the surety company acts as a financial guarantor, who can levy cash quickly in the event of a successful claim against the business by a client in the event of malpractice. The business owner must usually reimburse the bond company to the full value of the damages, meaning that the surety company’s role is to keep cash to the value of those damages quickly accessible. It is not, however, the surety’s responsibility to bear full responsibility for those damages.

In any industry which requires bonding, it is essential for businesses to post the required surety bond before they may operate legally.

Obtaining a commercial bond is a simple process. First, you must clarify what kind of bond is required for your business. Most local government websites explain which bonds are required for the different types of businesses which operate within their jurisdiction. Equally, feel free to explore below for more information on the types of bond available.

Once you know the type of commercial bond that you need, you can begin your online application process.

This will usually begin with an examination of your credit history. This is an essential step for those underwriting in the surety industry and is common policy amongst surety companies. As surety companies take on risk in the process of granting bonds, they prefer to grant bonds to business owners who they believe are reliable.

To this end, bonding companies use credit reports as a means of assessing the reliability of their potential customers. Applicants with higher credit scores are usually charged less, whilst applicants with lower credit scores usually pay a higher premium. This is because applicants with strong credit histories are considered to be lower risk, whilst applicants with weaker credit histories are deemed higher risk.

Once your application has been reviewed by the bonding company, your bonding agent will contact you, offering you a bonding agreement and the price of your bond premium. Once the bond premium has been paid, and the contract signed, then you will be granted your commercial bond, allowing you to operate legally alongside other bondholders.

The amount that you pay for your bond will be a small fraction of the overall bond value. This fraction is known as the bond premium, or bond cost.

This cost will vary on a number of factors; the first of which is your credit history. As explained above, surety companies prefer to cover customers who they deem reliable and will charge their customers accordingly. For applicants with average credit, or a FICO score between 650 and 675, rates are often found between 3% and 5%.

The second factor is the overall value of the bond. For example, an applicant with average credit might expect to pay between $150 and $450 for a bond worth $5,000. However, an applicant with the same credit score might pay between $1,500 and $2,500 for a surety bond worth $50,000.

The cost can also vary depending on the length of time for which you wish your bond to be active, or the bond term.

To get a more accurate indicator of how much your bond will cost, apply for a free quote today.

Sureties treat an applicant’s credit score as the most important piece of information when calculating their premiums. The personal credit score of applicants is considered to be so important that there are whole groups of surety bonds, such as contract bonds, which are impossible to get with bad credit.
Fortunately, this is not the case for most types of license and permit bonds (commercial bonds), meaning that bad credit is not a significant problem for the vast majority of applicants. It does mean, however, that business owners with weaker credit histories will pay slightly higher premiums. Lance Surety Bonds has an excellent bad credit surety bonds program, which can help you stay in business despite your credit issues.

For applicants with bad credit scores, the cost of bonds can often range between 5% and 10% of the overall bond value. That means that a bond worth $50,000 might cost applicants between $2,500 and $5,000. However, it is sometimes possible for applicants with weaker credit histories to reduce their rates by supplying additional information, such as evidence of the possession of liquid assets.

The terms commercial bond and license bond are used to cover a miscellaneous collection of different bonds. These bonds are usually required of corporations or small businesses which sell goods and services to customers. Commercial bonds are required in a wide range of industries, and as such, a wide range of commercial bonds are available. Some of the popular and common types of bonds are:
 

• Auto Dealer Bonds
• Alcohol and Liquor Tax Bonds
• Blue Sky Bonds
• Broker Bonds
• Citrus Fruit Dealer Bonds
• Driving School Bond
• Grain and Commodity Bonds
• Mortgage Lender Bonds
• Professional Fundraiser Bonds
• Seller of Travel Bonds
• Third Party Administrator Bonds

The Lance Surety team are experts in the bond industry and can help you to find the bond you need at the best rates.

If you still can’t find what you’re looking for, or want to speak to one of our experts, then contact us on 877.515.4146, or leave us a message through our live chat.