Surety bonds are three-party contracts in which a Surety company financially guarantees to an obligee (entity requiring a bond) that the principal (you, the contractor) will act within the terms established by the bond.
The functionality of surety bonds and the role of surety agencies are very straightforward however, there are many misconceptions and myths about them. Here are some of the most common:
Surety bonds are insurance for the principal. A surety bond IS NOT insurance for a principal. Surety bonds protect the obligee. They are guaranties by a third party to the obligee that the principal (contractor) will meet their contractual obligations.
Contractors must obtain commercial surety bonds before starting a business. Although surety bonds are a requirement for many licenses, they are NOT required to start a new business. A business needs to become legally established before it can become bonded.
Surety agencies set license bond requirements. Surety companies do not play a role in license bond requirements. License bond requirements are determined by state license boards and/or consumer regulations departments. Surety agencies rely on the information provided by state or municipal issued statutes.
Surety bonds can affect a contractor’s credit score. While soft credit checks are usually required during the underwriting process to determine a bond price, purchasing a surety bond will NOT affect a credit score. That being said, should a claim pay out against a bond and the principal chooses not to pay the bond back, the surety will send the principal to collections and that WILL affect a credit score.
Contractors in a Credit Repair status cannot get a surety bond. A credit score in a status of repair does not disqualify a contractor from getting bonded. However, a lower credit score will result in a higher premium.
It takes longer for contractors in a Credit Repair to get bonded. False. Surety bond applications are treated the same. Just expect to pay a higher premium, as stated above.
Large, established construction companies don’t need to get bonded. Large companies are not immune from surety requirements. Most state, municipal or government projects require surety bonds. Exceptions for companies based on their size and capabilities are not made because again, the bond is not insurance for the company, it’s financial protection for the obligee.
If your business has surety needs or has questions regarding surety bonds, give us a call at (800) 432-2641. For more than 50 years our team has provided contractors exceptional service and rates. Our clientele and perfect license record speak for themselves!