Cost of a surety bond

posted in Financial Information by Admin on July 9th, 2010

Cost of a surety bond
While getting a surety bond, one of the primary questions that comes to our mind is the cost of a surety bond. Surety bonds are considered more like a credit which is being extended to the principal. Hence not everyone is going to get the same rates. A lot of factors are considered to decide on the rate. Personal credit position is not something which exclusively determines the rates. Factors which may be considered are the financial condition of the company of the principal, its financial statements, the personal financial condition of the owners, the owners track record in the business or the industry etc. Thus, by providing only personal credit details, one cannot expect that the agents will be able to give an accurate cost of a surety bond. While approaching an agent, most principals would request for a ball park figure of the rate at which they can get a surety bond. However, the agents are hesitant to quote anything. This is not because the agents are incompetent to give a quote or that they don’t want to give you a fair idea of the cost of a surety bond, it is because the rates vary a lot and the actual cost cannot be calculated until the application has been processed completely. The usual cost of a surety bond is usually around 3%, however, these rates can go as high as 15% in the high risk category. There are a lot of factors which could increase the cost of a surety bond. For example, if the agent the principal has hired happens to be a paper pusher who submits an incomplete form without credit information of the principal to the bonding company, this may result in the bonding company doing its own credit inquiry on the principal. If multiple bonding companies have been approached and each of them do their own credit inquiry, this could seriously hamper the credit rating of the principal and thus shoot up the cost of a surety bond. In case of contract or payment bonds, the bonds can get specified in the contract documents and the bond premium amount is also mentioned. However, if the contract amount changes, the premiums will also change to adjust to the contract price. Thus the cost of a surety bond, mainly payment and contract types, are based on the value of the contract. The cost of a surety bond in the bad credit bond market is considerably higher as these bonds are issued to principals with poor or no credit standing. Thus, to cover the high risk involved in bonding these principals, the premiums are also quite high.

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