Surety EDU: How commercial, contract and court bonds differ

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This article is the seventh installment of our Surety EDU series, which is brought to you by nationwide surety bond agency SuretyBonds.com. Check back next Friday for another in-depth look into how surety bonds work.

Commercial bonds are required as a part of many licensing processes.

Surety bonds can be grouped into one of three major categories: commercial bonds, contract bonds and court bonds. Although all surety bond types function in the same basic way by ensuring certain obligations are fulfilled, there many differences among them.

How they work

The obligation involved with commercial bonds typically requires some sort of compliance. For example, a business owner or other working professional might be required to comply with certain laws and/or regulations. Commercial bonds typically benefit consumers who could be harmed as a result of professionals who fail to work according to industry standards. Oftentimes commercial bonds are required as a part of the business licensing process. If an individual cannot qualify for the required bond, a business license will not be issued.

The obligation involved with contract bonds requires individuals to fulfill contracts. These bonds are frequently used in the construction industry to ensure contractors fulfill contractual obligations when working on projects, but they’re also used for other types of contracts. If an individual cannot qualify for the required bond, the project owner will not choose the individual for the project.

Court bonds are used to prevent court proceedings from losing money. These bonds are typically required to prevent individuals from filing frivolous cases that are likely to waste time and money. If an individual cannot qualify for the required bond, the court will not accept the case.

Risk

Because they function as financial guarantees, contract and court bonds are riskier for surety providers to back. As such, individuals who need a contract or court bond typically undergo a much more thorough application process. Most commercial bond types involve little risk, so they’re easier to qualify for and involve a simpler and quicker bonding process.

Credit scores and costs

Because most commercial bonds aren’t very risky for surety providers to underwrite, individuals can usually still qualify for them even if they have a low credit score. They’ll qualify for the nonstandard (a.k.a. bad credit) market, however, which means they’ll pay a higher premium.

Commercial bond rates are usually based solely on an individual’s credit score (though sometimes additional application information is required). The higher an individual’s credit score is, the lower the rate, and the lower an individual’s credit score is, the higher the rate. Applicants with good credit typically pay a premium that’s calculated at 1-5% of the bond amount depending on the type of bond. Applicants with bad credit typically pay a premium that’s calculated anywhere from 10-20% of the bond amount.

Most surety underwriters require that individuals looking to get a contract or court bond have a credit score of at least 700 before the bonding process begins. Rates for those approved will vary on a case-by-case basis depending on the exact type of bond required and its associated risk, the amount of coverage needed and the individual’s application credentials.

Learning about surety bonds can be a harrowing task, but being able to discern the differences between the three major types of bonds can make the quest more manageable.