Thursday, January 4, 2018

How to Secure a Surety Bond as a Small Business

A surety bond can benefit small businesses such as construction companies or other contractors by widening their opportunities. 

The surety bond is basically an insurance policy issued to guarantee a client certain compensation if you fail to meet the terms of an agreement. It’s usually expected in state or government contracts, but many other organizations or individuals may request one. 

If you are asked to provide a surety bond, here are some tips on securing one through an agency like Zuma Insurance.

Decide What Kind of Bond You Need

What kind of bond you need depends on what industry you’re in and what kind of obligations the client expects you to honor. 

For government agencies, sometimes a certain type of bond is needed to gain a license. Usually the client will tell you what’s expected as part of the agreement or proposal. 

A general Small Business Service Surety Bond may be sufficient, or a Performance and Payout Surety Bond for stipulated conditions. A bidder’s bond may be required just to bid on certain contracts, or additional policies such as CA concrete contractors insurance.

Bond Costs

You also need to know how much coverage the requesting party, or obligee, is expecting to cover their risk. The actual cost of the bond to you is usually between two and 10 percent of the total coverage, so you’ll need to make sure your profit margin more than covers the bond’s cost. 

This cost will be calculated by the bond issuer based on risk factors such as your credit score, history, and current financial obligations. 

Some insurers will expect you to have 10 percent of the bond’s value in capital funds, or may limit the amount to 10 or 15 times your business equity.

Where to Look

One great source for obtaining bonds is the Small Business Administration. They will charge a fee for their assistance, but it’s only 0.729 percent of the total contract value.

If you can find more than one insurer that provides the type of bond you need, you’ll be able to compare to get the best rates and “bonding capacity”, or cap limit. 

For a sole proprietorship, a bond may be dependent on your personal credit score more than your business credit, with scores as low 550 occasionally accepted. 

The exact terms usually vary from one insurer to another and include other business factors, as well, such as years of experience and financial history. 

You can also apply for and obtain surety bonds from companies operating online. Make sure the issuer is licensed to provide bonds.

When looking for a surety bond, be sure you have all the information and references requested. Approving your bond may take anywhere from a few days to a few weeks.

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