What Is Proof of Financial Security?

Proof of financial security guarantees that an individual or company has the resources to cover potential financial losses and fulfill contractual or licensing obligations. 

For example, freight brokers must file proof of either a $75,000 surety bond or a $75,000 cash collateral trust fund for federal licensing. This ensures that they have financial capital to cover any possible damages caused by a broker.

How Can I Prove Financial Security? 

Depending on your state or industry, you may have several options to prove financial security for licensing. Licensing entities most often require one of the following types of financial security:

• Surety bond: A legal contract between three parties: the principal (you), the surety (us) and the obligee (the entity requiring the bond). If a claim is made, the surety will back the full bond amount and then seek repayment from the principal. Learn more about surety bonds here.
• Insurance policy: A two-party agreement that covers potential losses, with the expected loss factored into pricing. Learn more about surety vs. insurance here.* 
• Letter of credit: A letter issued by a bank that guarantees complete and on-time payment from a buyer (you) to a seller (the entity requiring financial security). LOCs typically cost 0.5–1% of the credit total plus a 100% cash collateral deposit. Learn more about surety vs. LOCs here.
• Certificate of deposit (CD): A deposit with a bank or credit union where funds are put in a savings account for a fixed term and earn interest. If a claim is made, the deposit will be used to cover costs.

*Note: Insurance AND a surety bond are often required for licensing. But, there are some license obligations where you can get a surety bond in lieu of insurance. 

Additional Forms of Financial Security for Licensing

Although less common, you may also have the option to submit one of the following forms of financial security: 

• Savings certificate or investment certificate: Savings certificates are issued by credit unions with a fixed interest rate and maturity date. Investment certificates, unlike CDs, also earn interest but are not insured by the Federal Deposit Insurance Corporation (FDIC).
• Federal or state bond as collateral: A bond issued by a government entity that earns interest until its maturity date. Unlike a surety bond, you are responsible for paying the full bond amount up front. If no claims are made, you will receive the bond amount back plus interest. 
• Cash collateral: A direct deposit of funds into an account as collateral
• Net worth: Documentation showing a certain amount in liquid net assets 

What Is Collateral?

Collateral is an asset, usually cash, pledged by a principal to the entity requiring financial security or placed in a trust account to guarantee the availability of the funds to cover potential damages.

What Is a Claim?

A claim is a formal request for compensation to recover financial losses. When you provide proof of financial security, you guarantee you will fulfill set contractual obligations. If you break the agreed terms, harmed parties can file claims.

What Are the Advantages of a Surety Bond?

Surety bonds often simplify the process of providing financial security. Here are some of the key advantages: 

• No collateral: Most bonds do not require collateral, allowing you to keep your cash.
• Affordable: Surety bonds only cost a small percentage of the total coverage upfront, with no recurring payments.
• Efficient: Surety bonds typically have a fast approval process or are available for instant purchase without a credit check.
• Easy renewals: Your surety provider will send you renewal reminders and instructions. Oftentimes, you only have to pay a renewal premium to maintain coverage.

What If I Have Bad Credit?

Is a surety bond your preferred option, but you’re concerned about being approved? Through the SuretyBonds.com bad credit bonding program, we approve 99% of applicants regardless of their credit history. Learn more about getting bonded with bad credit here. 

How Do I Know If Another Option Is Best for Me?

Although a surety bond has its advantages, other forms of financial security may be best for you depending on the following conditions:

• Availability of liquid funds: If you or your business has high cash reserves to set aside, it may be easiest for you to choose a collateral-based option. This is especially efficient for “liquid” businesses.
• Ability to customize terms: Surety bond forms are often standardized and cannot be personalized to a specific agreement. Other options, such as letters of credit, allow you to establish when and how payments should be completed.  
• Likelihood of claims: If you expect to have claims, insurance may be the best option for you (if available). There is no repayment obligation if a claim is made.
• Potential to earn interest: If you have the funds to put away and don’t expect a claim, an investment account option or government-issued bond would be best for earning interest.

If a surety bond is the best option for you, apply online today for your free surety bond quote. Just select your state and bond type to get started!

Can I Choose Which Form of Financial Security I Use for Licensing?

Not always, since the types of financial security you can submit vary by industry and state. Check your state or local law, or contact the licensing authority for more information.

Sometimes, you must submit an application, extra documentation, or make an appeal to qualify for an alternative option.

Want to Learn More?

Visit our Surety Bond Education Hub for more information on surety bonds. If you have any questions or concerns, call 1 (800) 308-4358 to talk to a surety expert today!