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Utility Bonds

Three images representing utilities. On the left, overhead electric lines. In the middle, natural gas pipes. On the right, water coming out of a faucet. A blue box reads, "Utility Bonds"

 

A Utility Bonds is a type of surety bond that protects a supplier of utility services from non payment by the person or entity using those services. Learn more about what Utility Bonds are, when they are required and alternatives to them. 

 

Why are Utility Bonds Required?

 

Utilities companies such as water, electric, gas companies provide necessary services to both residential and commercial properties. These utility companies often invoice for services after they have been provided and may not be able to easily shut off services for non-payment. Therefore, a deposit is often required from the customer to provide protection against non payment to the utility. A Utility Bond is one such way to meet the deposit requirements.

 

How a Utility Bond Works

 

The Principal on a Utility Bond is the person or company that is required to file a deposit with the Utility Company. The Principal pays a fee to a Surety Bond Company, who in return, provides a guarantee to the Utility Company. The Utility Company is the Obligee. They receive a promise from the Surety Bond Company that if the Principal does not pay their utility bill, the Utility company can make a claim and collect the bond amount from the surety bond company. Utility Bonds are a type of financial guarantee bond. They basically guarantee the payment of the utility bill or give the Utility company financial recourse against the bond company.

 

This chart shows how utility bonds work including the relationship between the Utility Company, the Principal and the Surety Bond Company

 

Who Needs to Provide a Utility Bond?

 

It depends on the Utility. Some utility companies require that all customers provide a utility deposit to guarantee payment. Others may only require a utility deposit if the customer has a history of being behind on payments or if the customer has unacceptable credit for the particular utility.

 

For commercial buildings, utility bonds are often required by all building owners. These utility bills can be significant and it provides a way of protecting the utility in the event that the building owner gets into financial distress.

 

In some cases, the Utility Bond is provided by the Owner of the commercial building. In other scenarios, the Utility may require a Utility Bond from each business that is leasing space in a building. 

 

How Do You Get a Utility Bond?

 

It depends on the Utility requiring the bond and the amount needed. Many smaller utility bonds can be purchased instantly online. These bonds may be written easily, often with only a personal credit check of the individual or business owner. You can search for these Utility Bonds by state below:

 

A green map of the United States. Graphics showing a gas pipe, electricity, water, internet and cable to the right. Utility Bonds by State on the left.

 

However, for larger Utility Bonds and bonds for individuals and companies with a history of payment delinquencies, more information may be required. Often this information includes a financial statement on the company or personal financial statements of the individuals. Surety Bond companies will want to make sure the individuals or companies have the financial resources available to make their payments and avoid a claim on the bond. 

 

Commercial Property Owners

 

Commercial property owners that need many utility bonds may choose to provide CPA prepared financial statements. These statements allow us to set up a surety line of credit so that additional Utility Bonds are easy to obtain and easy to renew each year. 

 

Even those with credit challenges or who have been delinquent in the past can usually obtain a utility bond. The cost may increase but there are programs available for nearly all applicants.

 

Indemnity is Required

 

For customers using Utility Bonds, it is important to remember that Utility Bonds are not insurance. Indemnity is required to obtain these bonds. That means that if a claim is made against the Utility Bond and the surety bond company has to pay, they will seek reimbursement from the Principal. 

 

What Does a Utility Bond Cost?

 

The cost of a Utility Bond is directly related to the amount of the required bond. Strong companies and individuals can usually obtain a bond for about 1% of the bond amount. Others may pay as much as 10% depending on their credit history and financial strength.

 

Alternatives to a Utility Deposit Bond

 

A utility customer usually has 3 options for a deposit with a utility company. They can post cash, an Irrevocable Letter of Credit (ILOC) or a Utility Deposit Bond. 

 

Cash

 

Cash is the least preferred option for most parties. It has to be fully funded and therefore is cash that cannot be used for other purposes. 

 

For example, suppose a business is required to post a $5,000 utility deposit guarantee. Using cash, the business would need to come out of pocket with the entire $5,000. However, purchasing a surety bond at a cost of 3%, that business would only use $150 in cash. That $4,500 difference could be used for other purposes. More can be read about Surety Bonds vs. Cash here

Irrevocable Letter or Credit

 

Some commercial companies choose to use ILOCs but with interest rates rising, this is becoming a more expensive option. ILOCs also tie up other borrowing abilities. More can be read about the advantages and disadvantages of ILOCs here

 

Vice President at Axcess Surety
Vice President of Axcess Surety. Surety Bond and financial expert dedicated to helping contractors, businesses and individuals understand and obtain surety bond credit.
Josh Carson, AFSB
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