Surety Bonds: Common Questions Answered

Written by Adam Peck Category: Injury Law January 15th, 2013 3 min read

What exactly is a surety bond and why should small business owners care?
A lot of people like to sum up a surety bond as insurance, but in reality, surety bonds are a financial guarantee. They are a part of the insurance industry but they serve as a financial guarantee for the obligee (or person requiring the bond which is usually the state).

How do I know if my business/start-up needs a bond?
Almost every small business is required or can utilize a surety bond in some way. For instance, many states require a sales tax bond for stores to operate. Almost every business that requires a license to operate in the state will be required to post a surety bond. Some of the more common industries include car dealers, mortgage brokers, and even insurance brokers. If you aren’t required to post a bond to operate, many companies look into getting a fidelity bond or a dishonesty bond which protect the owner against employee theft.

How do I obtain one?
Most of the time, it’s a simple process. If the bond required is $25,000 or less, often just submitting an application is all that is necessary. With the application process there is a credit check and depending on how the credit check comes back, they may or may not need to submit and any sort of financial data or bank letter of credit. For most people with a good credit background, they only need to submit an application and they will be on their way with a bond in hand. This process usually takes anywhere from 24 to 48 hours. If there is a cosigner, letter of credit or collateral needed, or you want to do a premium financing surety bond then the process will usually take a little longer to complete.

One thing to consider before you get a surety bond that will save you time in the long run is that when you first submit an application, if there is another partner (or anyone with more than 10% share) in the company, they also need to be underwritten on the bond. So if there are three partners, there need to be three applications with three signatures.

What do surety bonds cost?
The cost is determined by examining the credit of the person needing the bond and what type of bond it is. A person with good credit will normally get standard rates that can range anywhere from .05% to 5% of the full bond amount. If the person has sub-standard credit, then they normally have to pay anywhere from 5% to 15% of the total bond amount.

Do I have to get a new one every year?
Most license and permit bonds are required to be renewed every year. There are thousands of types so it really depends on the specific bond that your company needs and the requirements that the obligee puts on the bond. This guest post was written by Kevin Kaiser of Surety Bonds .com[link:http://www.suretybonds.com]. If you want to learn more about how surety bonds are involved in small business check out our podcast with David B. Willis on Texas Small Business Law[link:http://davidwillislaw.com/texassmallbusinesslaw/surety-bonds-for-small-businesses/] or visit the Surety Bond Education Center[link:http://www.suretybonds.com/edu/].

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.