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Why Get a Surety Bond?

November 13, 2021

What is the purpose of a surety bond?

A surety bond is a three-party agreement between the principal, the obligee, and the surety. The principal is the entity that needs to prove financial strength for an obligation they need to fulfill. The most common example of this would be an insurance company that needs to be able to pay out benefits due to their customers in case something happens. For example, many car insurance companies are required by state law to have a surety bond guaranteeing their ability to pay any claims made against them by their customers.

The obligee is usually some kind of government agency or official who requires proof that you will fulfill your promises before they withdraw resources from you (cash money). This could be as simple as planning permission for a new building, or it could be the approval of a government agency allowing you to do business with them.

Finally, the surety is your guarantor - they are guaranteeing that if something happens where you can't fulfill your promises, they will. They're essentially standing in for you if something goes wrong. This is why it's called a "surety" bond... the surety guarantees that the principal will abide by their obligations.

Is a surety bond good?

Surety bonds are a great idea because they provide both legal and financial protection. A lot of the time when you're dealing with a large contract or deal that involves government agencies, you'll need proof that your business is financially sound enough to fulfill your obligations. Surety bonds are the best way to ensure this proof of strength.

A lot of times businesses will wonder what happens if something goes wrong. For example, say a business owner has a merchant account through their bank for accepting credit cards. They think everything's going ok until one day they get a letter from their bank informing them that there was some kind of breach in security and as a result, they're responsible for any losses incurred by the bank because it happened on their end. Now, this small company is thinking about filing bankruptcy because they can't afford all those bills coming in from customers who don't have money coming out of their accounts.

This is where a surety bond really proves its value because it's the surety who gets blanketed with all of these obligations (the company no longer has to pay for them) and they will cancel the bond - notifying you that you're no longer covered by this agreement. 

How long does a surety bond last?

A surety bond can last as little as one year or as long as 5 years depending on what the business owner needs. The shorter-term bonds are good for new businesses who need proof of strength right away due to an immediate sale/deal they have on the horizon and need approval from some government agency (the city planning department, for example). If you want to save on monthly filing fees and only

A surety bond will not show up on your credit report. This is because they are not loans, so it doesn't matter how you've repaid them or if you pay them back at all - they still won't appear on your credit. 

Is a surety bond considered debt?

No, a surety bond is not debt. Because it's not a loan, you also don't have to worry about paying back monthly installments or having your credit lowered. It won't show up on your report and there will be absolutely no impact on the financial status of your business by getting one - this is how much banks trust you with their money!

You'll pay around 2% of the total amount covered under the agreement as a filing fee for purchasing a surety bond. For example, let's say you need $100k worth of coverage from a surety company and they charge 1-2% as their fee to cover the surety bond (you would pay anywhere from $2,000-$4,000).

A surety bond proves that you have enough resources to fulfill your obligations. It also protects you from other parties if something goes wrong. Finally, it can protect you from bankruptcy if something goes really wrong and there is an overwhelming financial loss. 

What credit score do I need for a surety bond?

You will need a good credit score, but not necessarily an excellent one. Depending on the surety company you go with, you could even get a bond as an individual who doesn't have a credit score at all. A lot of lenders will require that your business has been in operation for at least two years before they'll consider approving the surety bond, but it's worth looking into what other requirements there might be from the companies you're interested in to make the process easier.

A surety bond can be obtained by starting a new business or expanding an existing one. A surety bond allows for payments to be made without fear of interruption because it protects both parties from any kind of loss or financial disaster. However, if everything goes well and there are no problems then after three years (situation and how much you're asking for (in coverage), banks might look at it one way or another.

For example - if you borrowed $5 million from a bank to build a new building and wanted them to accept your surety bond as part of the collateral, you would definitely need an excellent credit score. If you're just getting started in business and only need $100k worth of coverage, then they might be happy with decent/average credit. The bottom line is that having good but not necessarily excellent credit should not preclude you from getting one.

Check out Axcess Surety Bonds to know more!

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