Understanding the Benefits of Investing in Commercial Surety Bonds 

Whether you’re an independent sponsor, private equity (PE) firm, or family office managing wealth, targeted use of surety bonds can support acquisition goals. A strong management team and positive working capital are essential for PE firms to obtain bonding capacity.

In addition, a sound portfolio of third-party guarantees can be redeployed toward activities better suited to investor value and capital preservation. 

Cost

The cost of investing in commercial surety bonds varies based on the type of bond, location, industry, risk level, and many other factors. It can be challenging to estimate your costs precisely, but you can acquire a ballpark figure by asking a reputable surety bond company for a quote.

Investing in a surety bond rather than posting cash, letters of credit or assets for security is an excellent way to manage your obligations with the obligees and meet state requirements. It can also save you considerable money over the long run by reducing your overall costs.

Usually, the price of a surety bond depends on the bond and is a percentage of the bond amount (or contract price). The rate is generally based on the applicant’s credit score and financial history. The more bonded projects you complete, the better your chances are of getting a favorable bond rate.

Purpose

When a principal purchases a surety bond, they agree to meet specific conditions and responsibilities. If they do not, the obligee (the party requiring the bond) can file a claim with the surety to recover damages from the principal.

These bonds help minimize risk, limit financial loss, and protect the public. Local, state, or federal governments often require them to ensure contractors adhere to local laws and regulations or guarantee public safety.

They also protect customers from fraud or exploitation by mortgage brokers, insurance adjusters, and other professionals. They differ from fidelity bonds, which are usually issued to protect companies from losses due to employee theft or fraud.

A commercial surety bond can attract business, enabling you to compete with more prominent companies for contracts. Whether in the construction industry, a mortgage broker, or a travel agent, a surety bond will help demonstrate your commitment to financial responsibility and ethical business practices.

Coverage

By purchasing commercial surety bonds, you may ensure that, in the event of an unanticipated catastrophe, you will be protected against financial loss. Government agencies often require these bonds as part of licensing requirements, but they also offer protection for consumers and businesses.

The coverage provided by commercial surety bonds depends on the bond type. For example, a construction surety bond guarantees that your work will be completed according to the contract terms.

A fidelity bond guarantees that your company will conduct business under state laws and regulations. States typically require this type of surety bond before getting a business license or applying for a permit.

Generally, commercial surety bonds can cost anywhere from $200 to $1,000 per year, depending on the coverage you need and the bond company you choose. Penalties for non-compliance can be as low as a fine or as high as a percentage of the bond amount.

Requirements

Surety bonds are insurance tools that ensure individuals and businesses operate according to state laws, industry regulations, and contractual expectations. They can protect public tax dollars, private investments, and consumer spending.

When a contractor bids for a job, the owner of that job (called the obligee) requires a guarantee of performance or payment. A surety bond is the insurance tool that ensures that this work will be completed on time and within budget.

Whether you’re an entrepreneur looking to hire a contractor for your next construction project or a government entity that needs to ensure contractors meet specific requirements before they can get started, there are a few things you need to know about commercial surety bonds.

Obtaining a commercial surety bond can be challenging, however. It will likely involve a credit check by an underwriter and a deeper look into your work history and background to determine whether or not you’re eligible for the bond.