How Does a Surety Bond Work?

Surety bonds are used in a variety of cases, such as a requirement for licensing, or for obtaining construction contracts. Their purpose is to provide additional safety in the name of the bonded entity.

In all these situations, the surety bond represents a three-party contractual agreement. The obligee is the entity that requires the posting of the bond. Often this is a local or state authority. The principal is your business, which needs to get bonded. The surety is the party that provides the security backing.

How exactly do bonds safeguard the interests of the obligee and its counterparts? If your business does not meet its legal obligations, which vary depending on the industry, the obligee or another affected party can demand a reimbursement via a claim on the bond.

What Types of Surety Bonds Are There?

While surety bonds can be used in a number of cases, there are three main types that are widespread in the U.S. today. These include license and permit bonds, contract bonds, and court bonds.

Whichever type of surety bond you need, it’s important to work with trusted partners. Lance Surety Bonds fosters close relations with the top A-rated, T-listed surety companies in the country. Getting bonded with us means your security backing is solid.

For any questions about the different types of surety bonds, don’t hesitate to call us at (877) 514-5146. Our experts are here to help!

1. License bonds

The most common type of surety bonds that are required from individuals and businesses are license and permit bonds, also known as commercial bonds.

If you want to get a professional license as an auto dealer, freight broker, or one of a variety of other trades, you may need to post a license bond. The bond is one of the requirements set by the licensing authority.

How is your license bond cost determined?

Your surety bond cost depends on the bond amount you need to post, and your current financial status.

In the case of license bonds, the authority that governs your industry sets a bond amount for all license applicants, or decides it on a case-by-case basis. This amount represents the maximum penal sum that can be repaid on proven claims. However, your bond price is much smaller.

The actual license bond cost is your bond premium. It is determined after considering your personal credit score, assets and liquidity, business finances and professional experience. The better your finances are, the lower your bond price will be. Still, there are options for applicants with problematic finances as well, such as our Bad Credit Program.

Getting your license bond

Obtaining your license bond is a straightforward process. You can apply online and get a free bond quote today. The underwriting for license bonds is quite fast, so you can expect to have your bond in a few days.

Learn more about bonding on our How to Get Bonded page, where you can find a full description of the process.

License bond renewal

As professional licenses are issued for a limited period of time– usually one or two years– they need to be renewed. This guarantees the continual legal compliance of licensed parties.

Usually, the license bond needs to be renewed along with the license. Keep in mind that at each renewal, the bond cost can fluctuate, as your finances change over time. This is a good opportunity to reduce your bond price, by improving your credit score and overall finances.

Most Popular Types of License Bonds

Auto dealer bonds

Most U.S. states require auto dealers to post an auto dealer bond as a part of the licensing requirements.

Mortgage broker bonds

Mortgage broker bonds are a typical prerequisite for getting a mortgage broker license in many states.

Freight broker bonds

All freight brokers and forwarders need to post a $75,000 freight broker bond to get licensed with the Federal Motor Carrier Safety Administration.

Contractor license bonds

In most places, contractors need to post a contractor license bond to obtain their contractorship license.

Alcohol tax bonds

Getting a license for trading with liquor involves obtaining an alcohol tax bond in many cases. The bond guarantees due payment of relevant taxes and fees.

Insurance broker bonds

Insurance brokers across the country may need to post an insurance broker bond as a part of getting licensed in their trade.

2. Contract bonds

The second most popular type of surety bonds are contract bonds. They are needed for individual projects when construction contractors are bidding for public and private construction works. The purpose of contact bonds is to guarantee that the bonded contractor will fulfill their contractual obligations under the project, and will execute all work in time and according to the contracted standards.

Types of contract bonds

There are a number of different contract bonds. The most common ones are bid bonds, performance bonds, and payment bonds. They are a typical requirement for contractors before they are awarded a construction project. Additional types include maintenance bonds, subdivision bonds, and supply bonds.

How is your contractor bond cost set?

As with other types of bonds, the contractor bond price depends on the bond amount that you are asked to obtain. The bond premium is the cost you need to cover, and it is only a few percents of the bond amount. Some contract bonds, such as bid bonds, are less expensive. The surety examines your financial profile and sets the premium on the basis of your financial and business strength.

3. Court bonds

The third common type of surety bonds are court bonds. They are needed only in specific circumstances, and are required by a court.

For example, if you want to appeal a case to a higher court, you might have to obtain an appeal bond, also known as a supersedeas bond.

If you are appointed as a fiduciary, meaning you need to be in control of another person’s assets, property or affairs, you might need to post a fiduciary bond, alternatively known as a probate bond.

Do you have questions about court bonds? You can call us at (877) 514-5146 and we will assist you with your bonding process.