Several different industries require individuals to hold a surety bond in order to operate legally. Unlike insurance coverage, a surety bond protects against bad business practices and violations related to city, state, or federal laws and regulations.
It may be a mandatory part of the licensing process for certain businesses to help safeguard customers, and it represents an additional expense to many businesses each year. If you own a construction business then visit Stokes Bonds for guidance.
While there is no getting around the requirement to have a surety bond in place, professionals across all industries can take steps to lower surety bond costs. That starts with understanding how bond pricing works in practice.
7 Ways to Reduce your Surety Bond Costs
#1 Understand Bond Pricing
Bonds come in many different forms, from contractor bonds to auto dealer bonds, but they all work similarly in terms of pricing structure. A surety bond price is based on several different factors, including the following:
- The amount of the bond
- The type of bond the business needs
- Personal credit of the bondholder
- Business financials of the bondholder
- Reputation in the industry
With these factors considered, a bond is priced as a percentage of the total bond amount, ranging from 1 to 10% for most bond types.
Naturally, if the bond required is a high dollar amount, businesses and individuals pay more for the bond, even if the other driving forces behind bond pricing are strong.
Fortunately, improving other aspects of bond pricing can be beneficial in reducing the total cost.
2# Get Your Personal Credit In Order
Personal credit history plays a role in bond pricing, arguably more so than other factors. A surety bond is a promise to pay claims against the bond on behalf of the business or individual.
However, bond claims need to be repaid over time, back to the surety agency or bond provider. Because of this structure, surety agencies work as a type of creditor to bondholders.
It makes sense then that personal credit history is a part of the bond pricing calculation.
If credit has been in an issue in the past, due to late payments, bankruptcies, court judgments, or other financial missteps, it is important to work toward improving credit before applying for a bond.
Some negative items on a credit report do not go away easily, but others, such as errors or high credit utilization, can be fixed fairly quickly.
Start with a check of credit history, and take steps to get your personal credit in order if you want a lower cost surety bond.
3# Organize Business Financials
Bringing down the cost of a surety bond may also be done through organization of business finances. Surety agencies take a close look at the financial track record of the business to determine how much of a risk they are taking on when approving a new bond application.
If business documents are not readily available, are inaccurate, or are disorganized, this may be a red flag to the bond provider.
Have clean, organized business financial documents, including cash flow statements, balance sheets, and profit and loss statements, ready to present to the bond provider when submitting an application.
4# Improve Liquidity
Some businesses may improve their surety bond pricing by increasing the liquidity of the company before applying for a new bond. Liquidity simply means the cash on hand to pay for debts or other obligations each month.
When this is low or non-existent, a bond provider may be wary of the company’s ability to pay a bond claim should one arise. Businesses can improve liquidity by collecting on outstanding customer invoices, paying off short-term debts, or restructuring short-term obligations to long-term debts.
These tactics provide more cash flow to the business and ultimately, a lower cost on a surety bond.
5# Minimize Claims
Bond claims are inevitable, especially in higher-risk industries. However, businesses required to have a surety bond in place can help keep the cost low by minimizing bond claims when possible. This does not mean avoiding potential claims from customers or regulators.
Instead, it means doing business in line with best practices and industry standards, and delivering on promises to customers at every given opportunity. If a claim does happen, work with the surety agency and the customer to get the issue resolved quickly and efficiently whenever possible.
Having fewer claims against your bond will reduce the cost of your bond in the future.
6# Work with the Right Surety
Another way to lower the cost of your bond is to work with a surety agency that provides access to several different types of bonds and bond providers.
Having more than one bond company to compare pricing is helpful in getting the best cost. Surety agencies that work with several different bond companies can also help those who may have limited industry experience or bad credit get an affordable bond quickly.
The right surety agency will also provide bondholders access to claims specialists should a bond claim arise in the future.
7# Build on Experience
Having strong personal credit, organized business financials, and minimal bond claims will go far in reducing the cost of your next bond.
However, it is also necessary to build a positive reputation for yourself in your business niche and gain the experience required to complete each job or sale in line with the standards of your industry.
Taking opportunities to build on your experience through training and education can also help minimize claims against a bond in the future.
These small steps can have a positive impact on your business and the price you pay for a required surety bond.
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Author Bio: Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.