For many businesses across a broad range of industries and sectors, a surety bond is a prerequisite to operating legally, providing a financial guarantee to customers and clients that your company can fulfill its obligations. However, for new businesses, understanding the purpose of a surety bond and its associated costs can be challenging.
In essence, a surety bond is an agreement between three parties. These are the principal (business owner), surety (bonding company) and obligee (regulating government body). They work to provide financial compensation to a customer or client when a claim is filed on the bond in the event a business fails to perform as promised or according to law.
With such a range of industries and activities to cover, the value of a surety bond varies considerably. In fact, generally speaking, they range from $5,000 to over $1 million, with the bond amount covering a broad range of issues specific to the sector they cover.
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Having said this, the value of a surety bond is not the same as the cost of a surety bond (bond premium), and any company obliged by law to obtain a bond will only pay a fraction of the total bond amount. Usually, this is an annual payment that is calculated on a number of factors, including the industry and sector the bond is applied to, and the credit score of the applicant.
In fact, surety bond costs can be as little as 1% to 5% for applicants with a good credit score, and a good bonding company will work to ensure your premium is as low as possible. For those with bad credit history the bond quote may be more expensive, however, it is almost always possible to obtain the bond required in order to ensure your business can thrive.
Here then, we look at the most common surety bonds and how to obtain a $5,000 bond even if you have bad credit.
Most Common $5,000 Surety Bonds
Auto Dealer Bonds
Many states in the U.S. require auto dealers to post surety bonds in both the new and used markets. Often, these bond amounts can be quite high, and the costs associated with purchasing the bond tied to the bond amount. However, depending on the particular state, bond amounts can be as low as $5,000 for those dealing in motorcycles and other small vehicles.
Contractor License Bonds
In states such as Alabama, Arizona, Indiana, Florida, Mississippi and South Carolina, a $5,000 bonding requirement is required for contractors. This covers a broad range of activities and is a prerequisite of gaining a license to operate in the states that require them.
Tax Preparer Bonds
A $5,000 surety bond is required by tax preparers, among others, in order to operate in states such as California. This protects clients against malpractice, and specifically acts as a safeguard for clients for those handling tax returns and other sensitive information.
Farm Labor Contractor Bonds
Farm laborers are required to post a bond amount of $5,000 in certain states in order to work. This type of bond varies quite considerably across the U.S. so it is important to check up on local regulations and a local bonding company to ensure the correct cover is applied.
How to Get a $5,000 Surety Bond with Bad Credit
For business owners with bad credit, the bonding process is usually just as simple as for those with good credit. However, generally speaking, those with credit scores of below 650 will need to pay a higher annual bond rate, since underwriting the bond is considered riskier for the bonding company and requires greater protection against financial loss. This is because surety companies are liable for any claims made against a business, and mitigating the risk is part of their job.
However, this shouldn’t put any business off applying for the bond they need, since some bond companies such as ours will work to find you the best rate possible to ensure that your business can operate legally. Generally, bond premiums for those with bad credit generally cost between 5% and 15% of the bond amount. So, for example, a $5,000 Arizona auto dealer bond may cost between $250 and $750 on a yearly term.