By Vic Lance
From auto dealers and liquor stores to telemarketers and travel agents, many types of small businesses today need to get surety bonds as part of their licensing. License bonds are a typical requirement that authorities include as an additional safety net for the general public. Additionally, contract bonds are also commonly used, as they are needed when contractors work on construction projects. Finally, some business owners may also choose or be required to get protection for their business in the form of fidelity bonds.
For business owners of different professional venues, striving to meet all legal and administrative criteria, the most important aspect of bonding, naturally, is the price tag. Since you have to cover a wide range of expenses when launching a company and renewing its licensing, the surety bond cost is certainly important.
What you should know about license bond costs
Various businesses need to obtain license surety bonds when getting a license to operate legally from local, state or federal authorities. The license bond serves as a security mechanism that guarantees you will follow all applicable laws in your professional activities.
Since this is one of the first business expenses you have to cover when launching a company, it’s crucial to know what factors affect the bond cost – and how to impact them positively, so you pay less. In general, the strength of your personal and business finances is what determines the bond premium you will be assigned. The more stable they are, the smaller the costs are likely to be.
The following criteria are the most essential ones that surety providers consider for license bonds:
- The most influential factor in the bond cost formation is your personal credit score as the owner of the company, contributing about 40% of the weight in the price formulation. The better the score is, the lower the bond cost would be. In addition, your credit report is also of significance. It’s a good idea to make outstanding payments and work on improving the overall report before applying for a license bond.
- About 30% of the bond cost formulation is done on the basis of your business finances. Showcasing strong company financial documents is sure to bring down your bond price.
- You can demonstrate your financial strength and thus lower your bond premium through additional factors, such as assets, liquidity, and investments.
The basics about contract bond costs
Small contractorships need to get an additional kind of surety bonds on top of their license bonds. Contract bonds are required of construction companies in cases when they want to participate in public or private projects. Most federal projects require contract bonds, as well as many state and private ones.
The cost of contract bonds depends on a number of factors, including personal credit and business finances, which affect license bond cost as well. When you obtain a smaller contract bond amount, your credit score and report as the owner of the company would matter the most in the cost formation. However, for larger bond amounts, the strength of your business finances will also be considered.
Here are some of the factors that affect your contract bond cost:
- If you can showcase a legitimate track record of completing construction projects on time and in good quality, thus showing your good standing, the bond price you will have to pay is likely to be smaller
- The contract size matters as well. When you have to get a large bond, the premiums are typically between 1% to 1.5% of the bond amount.
This is just a preview of explaining how bond premiums are determined—and how you can reduce them. To help you understand more, check out this recently published free ebook, The Cost of Surety Bonds: Everything You Wanted to Know.
To download the whole ebook, click below.
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps business owners get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business. Follow him on Twitter: @Lance_Surety