Business owners often try to follow strict budgets, especially when they’re preparing to open their first business. Being able to plan for expenditures from the get-go helps business owners set accurate budgets that they can stick to. Unfortunately, trying to budget for expenses associated with the licensing process, such as surety bond costs, can be challenging.
Predicting a surety bond cost is complicated because so many factors affect the exact rate a surety will charge for an individual bond. No matter what your profession is or what kind of surety bond you need, you should be aware of the five key factors that will affect what you pay to get bonded.
1. Specific surety bond type
An individual surety bond cost will vary greatly based on the specific bond type that’s needed. For example, notary bonds usually only cost about $100, but contract bonds that apply to multimillion-dollar construction projects can require a contractor to provide a bond that costs tens of thousands of dollars. Surety bonds are calculated as a percentage of the bond type, and this percentage varies depending on the bond’s inherent risk. Surety providers logically charge more to issue bonds with historically risky pasts, such as telemarketing bonds, because they take a greater risk in backing those who work in markets that have been known to take advantage of consumers in the past.
2. Variations among government agencies
Most small business owners purchase surety bonds because a government agency requires them to as a part of the licensing process. Each state agency regulates its industries by enforcing various surety bond regulations, and each one requires a surety bond amount that’s outlined in the specific law. Some surety bond types even allow for the exact amount to vary on a case-by-case basis. For example, contract bonds make up a large portion of the surety market, and each one that’s issued requires an amount that’s based on the total project cost. Conversely, many commercial license bonds, such as MMA sports promoter bonds, are issued in a standard amount across the board.
3. Personal/professional credit scores and other financial records
Before sureties issue bonds to their clients, they conduct a thorough background check that helps determine an appropriate surety bond rate. As a part of this process, sureties examine different aspects of an applicant’s work history and financial records, which sometimes includes a credit review. Poor credit scores draw attention to applicants who have been financially unstable at some point, which could put the surety at an increased risk for loss in the future. When applicants have credit above 700, they pay a much lower premium that’s calculated as just 1 to 5% of the bond amount. So if the needed bond amount is $10,000, a financially sound principal will pay about $100 to $500 for the bond. Fortunately, 99% of all applicants can qualify for the bonds they need regardless of credit.
4. A need for financing
Financing options are often vital for those who might not have the funds needed to purchase a surety bond upfront. For example, those with poor credit often finance their surety bond payments because the premiums are more expensive. However, choosing to finance the premium and pay for the bond over time means principals pay more in the long run. So while financing might be beneficial for some business owners, they should know that it will add to the bond’s total cost.
Although some basic surety bond types, such as auto dealer bonds, can be easily calculated with a surety bond calculator, pinpointing the costs of other bonds can be much more challenging. The specialists at SuretyBonds.com understand the value of effective budgeting, which is why we provide all applicants with free, no-obligation price quotes. The best way to budget for your surety bond cost is to give yourself plenty of time to apply for your bond. Once you get free price quotes back, you’ll be able to budget your surety costs much more accurately.