What is the Cost of a Surety Bond? | Risk Strategies

The cost of a surety bond depends on factors such as bond type, required amount, applicant's credit score, and state regulations. A surety bond is essential in many industries, especially for contractors, as it ensures a party meets its obligations or compensates others if they fail.

With the surety market projected to reach US$ 25.18 billion by 2027, understanding how bond costs are determined and the factors affecting these prices can help businesses make informed decisions. This article will explore factors influencing bond costs, cost variations by bond type, state influences on pricing, and how to get a bond with bad credit. We’ll also provide tips to help reduce surety bond costs.

Factors Influencing Surety Bond Costs

The cost of a bond, often referred to as the premium, is calculated based on several key factors by surety experts. Understanding these elements can help you plan accordingly.

Factor 1: Bond Amount

The bond amount is a key factor in determining the premium. The premium is typically a percentage of the bond amount, ranging from 1% to 15% based on risk. For example, a $100,000 bond may cost between $1,000 and $15,000 annually, depending on the applicant’s creditworthiness and other factors. However, most bond premiums tend to cost between 1% and 3%.

Factor 2: Credit Score

One of the key determinants of surety bond costs is the applicant’s credit score. A higher credit score typically results in lower bond premiums, as it indicates a lower risk. Applicants with good credit (700+) generally face premiums between 1% and 3%. Those with poor credit (below 600) may face premiums as high as 15%.

The Impact of Credit Scores on Surety Bond Premiums

• 700+ Credit Score: Premium rate of 1% - 3%
• 650 - 699 Credit Score: Premium rate of 3% - 8%
• Below 650 Credit Score: Premium rate of 10% - 15%

Factor 3: Industry and Bond Type

The bond type can impact cost. Industries like construction may require performance or payment bonds, which typically cost more than smaller or general bonds due to increased risk.

Factor 4: Bond Term Length

The length of the bond term also affects cost. A one-year bond usually costs less than a multi-year bond. However, multi-year bonds often have lower annual rates overall.

Cost Variations by Bond Type

The cost of a surety bond varies based on the bond type. Different bonds serve different purposes and have unique risk profiles that influence pricing.

1. Contractor License Bonds

Required for contractors to operate legally in some states. These ensure compliance with licensing laws and ethical standards.

2. Performance Bonds

Used on government or large private projects to ensure contractors fulfill contracts. Costs range from 1% to 3%, but may be higher for high-risk applicants or complex projects.

3. Fidelity Bonds

Protect businesses from employee theft. Typical cost is 1% to 5% of the bond amount annually, depending on business size and coverage needed.

Calculating Surety Bond Costs

The price of a surety bond is calculated as a percentage of the total bond amount. This rate is based on the risk level assessed by the surety and typically ranges from 1% to 10%. Use our surety bond cost calculator to estimate your premium.

Example

Suppose your business requires a $25,000 surety bond. Based on credit history, financials, and industry experience, the surety sets your rate at 1.5%. You would pay $375 (1.5% of $25,000).

State-Specific Influences on Bond Costs

Different states have different requirements for bond amounts, bond types, and the qualifications necessary to obtain a bond. State influence on bond costs can vary based on:

• Bond amounts: Certain states require higher bond amounts for specific industries or professions. For instance, in California, contractors may need to post a bond of $12,500 to $25,000, while other states may have significantly lower or higher bond amounts.
• Local regulations: Each state can impose different requirements for bonding, including additional qualifications for the surety company or requirements for additional bonding types, such as subcontractor or payment bonds. There are also hidden costs to consider, such as bond renewal, which again vary by state.

Obtaining Bonds with Bad Credit

Obtaining a surety bond with bad credit can be challenging, but it is possible. Surety companies take on more risk when issuing bonds to individuals or businesses with low FICO scores, which typically results in higher premiums. However, applicants with bad credit can take steps to improve their chances of securing a bond.

1. Collateral requirements

If an applicant has poor credit, the surety company may require collateral to mitigate the risk. Collateral could include cash, property, or other assets to cover the cost if the principal fails to meet their obligations.

2. Co-signers or guarantors

Some individuals or businesses with poor credit may be able to secure a bond by involving a co-signer or guarantor with better credit. This option reduces the risk to the surety company and may help reduce the overall cost of the bond.

3. Higher premiums

Individuals or businesses with low credit scores can expect to pay higher premiums, often in the range of 10% to 15% of the bond amount. However, once the bond has been maintained for a few years, it may be possible to refinance at a lower rate.

Surety Bond Cost vs. Bond Amount

The bond amount and premium are key to understanding a surety bond’s cost. The premium is usually a percentage of the bond amount. For example, a $50,000 bond may cost $500 to $2,500 annually (or more with low credit or larger bonds), depending on credit score, bond type, and industry.

• Smaller bonds: Smaller bonds, such as those for contractor licensing, tend to have lower premiums, often between 1% and 3% of the bond amount.
• Larger bonds: Larger bonds, such as performance bonds for large construction projects, may charge a higher percentage, sometimes as much as 10% or more, depending on the project risk and credit score.

Tips to Reduce Surety Bond Costs

There are several strategies that can help businesses and contractors reduce their surety bond costs, including:

1. Maintain good credit
   Your credit score significantly affects your bond premium. Keeping it in good standing helps secure the best rate. Regularly check for errors and pay off outstanding debts to improve your score.
2. Consider a longer bond term
   Paying for a multi-year bond upfront may lower your premium. Many surety companies offer discounts for long-term commitments, reducing administrative costs.
3. Shop around
   Surety companies offer different rates and terms, so compare options before choosing a provider. Researching can help lower your bond costs.