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Why Might a Builder Need a Bond? The Simple Guide to Construction Bonds
By M Wyzanski
Rob is a commercial builder. After submitting construction plans to the township, he was informed that his project was approved with one provision: aside from the office building he would construct, he must make certain enhancements to the street site. These improvements included a sidewalk, street lights, shrubbery, and a parking lot as well as a garage
As per standard procedure, the Township's engineer came down to the building site to calculate the cost of their stipulated improvements. His approximate assessment of $60,000 seemed logical to Rob who viewed it as an investment that would only add to the profits he would eventually rake in.
At this point, the Township wanted a form of guarantee that Rob would in fact complete the improvements within a suitable time frame. They asked Rob to lock $60,000 into a bank's escrow account. Rob understood that if he would follow this directive, the funds would be inaccessible until all aspects of the improvement would be completed. The notion didn't make business sense and he turned to an alternative in the form of a site-improvement bond that can be obtained from an insurance agency.
The Sensible Alternative: A Construction Bond
A construction bond or site improvement bond is offered by an insurance company. It serves as a guarantee to the Township that the builder will complete their specifications. As guarantor, the insurance company pledges that it will provide the capital needed for the job to be finished, in the event the builder does not come through.
The construction bond is the functional route to the Township's requirement and allows the builder to free up his money while only paying insurance premium costs as he commits himself to completing his obligations. Approval of the initial bond application is similar to that of a mortgage's.
Aside from the standard conditions to insurance underwriting, Rob needed to present the engineer's assessment of improvement scope together with the estimated beginning and end construction dates, and approximate cost and sum of bonds.
In all, Rob was required to provide corresponding paperwork: site improvement request form, contractor answer sheet, appraisal of the project, assessment of the engineer, plot copy, agreement of the improvement, personal and business financial statements, credit release, verification of bank account and proof of capital funding.
Before long, Rob's application was approved. Following his submission of the insurance bond certification, Rob began construction minus collateral and with just the cost of an insurance premium. When the office building was finished, it proved to be as profitable as Rob had imagined!
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How Much Does a Surety Bond Cost?
By John Bows
We must first understand what a surety bond does as well as the factors that are involved that will determine the rate as well as obtaining a surety bond approval. The surety company will evaluate your credit, experience, and financials. The process is very similar to apply for a business loan. Rates vary on a multitude of conditions such as which state is it for, what type of surety bond is needed, what is the financial outlook for the company or individual, how much experience does the business have and of course, which surety company is writing it.
Most companies are looking for a credit score above a 670 with no public records, collections, or slow pays. They also review your business financials to make sure that your company has a positive net income and worth. The surety company requires that your financial equity be at least five times the bond amount. Therefore, if you are applying for a $50,000 Surety bond the surety is looking for a net worth above $200,000. Keep in mind this is different for each bond type and state because some types of bonds have a higher loss ratio than other types of bonds. Remember that you are indemnifying the surety so the surety wants to make sure you are able to pay a claim if one occurs. If you meet these requirements and the type of surety bond is not considered hazardous such as a financial guarantee than you should be able to qualify for a preferred rate of 1% to 3% of the surety bond amount. Keep in mind that each surety has a minimum premium for a bond, which is usually $150.00 to $250.00, but you only run into these scenarios if your bond amount is under $25,000. So using a $25,000 surety bond as an example and the rate was at a 3% the cost would be $750.00.
Unfortunately, not every person or company can meet the surety requirements for preferred rates or even qualify for bonding, especially with the surety bond market tightening due to an influx of claims. Many Surety Companies will require collateral or simply decline your submission if you cannot qualify. Fortunately, there are still programs that will not decline your bond due to credit or other conditions they will just charge a higher rate.
Here is how is how it works if your business does not qualify for normal bonding the rate can be anywhere between 4% to 25% rate this is only for License and permit bonds. So if you where applying for a $100,000 Surety bond and your credit, financials or experience do not meet the surety companies requirements instead of declining you the rate will be higher for an example if you where approved at a 5% rate the cost would be $5,000.00 with no collateral. You may say to yourself well I would rather post the money with the state instead of paying a little more for my surety bond, you can of course do that but keep this in mind the state will not release your collateral until the statue of limitations is up. Therefore, after your bond is no longer needed or you are no longer in business the state will not release the collateral for several years.
If you want to learn more about a specific Surety bond type you can always visit us at our website Surety Bond Blog for more information.
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The Facts About Surety Bonds and a Focus on Contractor License Bonds
By Bryant Da Silva
Even in today's world of economic uncertainty people still need to get things done. Unfortunately a lack of trust in the market can also lead to a generalized lack of trust of any outside source you might need to provide a service. It comes down to question of reliability and confidence: you need a service but need some guarantee of its completion. Exactly what could provide the surety you need?
What you need is a Surety Bond.
Understanding Surety bonds involves understanding some area specific jargon and facts you deserve to know.
While these bonds are issued by insurance companies, and have similar qualities to insurance, they are not insurance. But bonds are done through insurance companies because they have solvency and can cover the penal sum (the amount due in the case of a default).
Surety Bonds involve a 3 party contractual obligation between the following:
1) the Surety - the insurance company that will issue the bond and act as an intermediary between the Principal and the Obligee
2) the Principal - the party responsible for the total and timely completion of the obligation established within the bond
3) the Obligee - the party that is issued the bond and is the recipient of the service set within the bond
Surety Bonds are essential for ensuring conditions of set within bonds and for ensuring the appropriate award of money damages in the cause of non fulfillment. Now you can go forward with a surety whether Principle or Obligee.
While this information is reassuring, there is still some additional information about Surety Bonds. All Surety Bonds include bond premiums as part of market competition and risk. Depending on the type of bond you seek, the percentages can range anywhere from 1% to 20% and they could include a minimum charge or even be set to a graduated rate. Don't forget that bonding rates can also vary according to the applicants credit
The time required to get a bond can range, depending again on the type of bond, from anywhere to same day, to a few days, to a week or more. Bond duration also vary according to type and can be from 1-3 years, the duration of a project, or a court appointed time span. So whatever type of bond you choose, make sure to do your research so you get the right bond for the right service for the right amount of time, and with the right amount of coverage. With a bond like this you have the research and guarantee of the surety to minimize your risk.
One type of Surety Bond of significance is the Contractor License Bond. These bonds are a sub-category of commercial bonds and license and permit bonds. They are important because they specify that contractors will operate their business according to all licensing regulation and statutes set in the bond form by the state. This Contractor License Bond is one of the requirements contractors must meet in order to gain a state license.
As we can see, Surety Bonds are extremely important and it is vital to have them. Do your research and get the surety you want.
To get more on Surety Bonds and for more information on Contractor License Bonds research All Surety Bonds.
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Surety Bond Applications Are Increasing Indicating That the Recession is Over
By John Bows
More business, are applying for surety bonds, does this mean that the recession is over? In this last quarter surety applications went up for the first time in almost two years. This is a good sign for the economy, since bonds are required for new businesses as well as existing businesses. Construction bonds went up too showing that the construction industry is slowly coming out of a slump. Hopeful these trends will continue and America's economy prospers once more.
Who benefits from Bonds?
A surety bond is an unsecured loan in force to protect a third party or parties named the obligee. The State in most cases is acting as the obligee on behalf of its citizens. The state requires bonds to be drafted to protect the individuals or companies that transact business with the principal bond holder. Most professional regulated businesses are required to satisfy this requirement before they can obtain a license. Contractors, Car Dealers, Mortgage Brokers are all required to obtain bonds. In some states Sales tax bonds are required for every business. Surety bonds have been around for thousands of years, they are the oldest form of Insurance.
Where do you get Surety Bonds?
In order to obtain a bond the principal must first fill out an application with a Surety Company. The next step is to find a Surety Company that will write the risk. Make sure that the Surety is licensed and rated for the State you're applying for the bond in. Your best option is to apply for your Surety Bond with Surety Agents. Look for Surety Agents that are not tied down to one company.
Underwriting for Bonds
Applying for a surety bond is similar to applying for a credit card or a loan. Surety Bonds are underwritten like how a bank would underwrite a loan. The Surety reviews the client's credit, personal financials, business financials, and experience. If the principal has credit issues or if the financials do not meet the liquidity requirements the bond's rate will be increased.
I hope you enjoyed this article. If you want to lean more please let me know
Contractors, car dealers, and mortgage brokers are required to have this form of Insurance. Surety Bond types can be confusing you can learn more about Surety Bonds with future articles.
You must have this requirement before the obligee will issue you a license. Check your credit before applying for the bond so you can have ample time to fix any issues. Depending on what type you need you may be required to present a business financial, personal financial and a resume.
I hope you enjoyed this article keep posted because there will be more to come. If you want to lean more about this topic or anything else please let me know.
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Differences Between Surety Bonds and Insurance
By Robert Jake
Surety Bonds are for consumer protection that coincides with professional services and licenses. Surety bonds are one of the oldest forms of insurance dating back thousands of years. Surety bonds are more of a reverse insurance policy protecting the consumer not the principal of the surety bond.
Commercial Insurance protects your business from being sued. Most common Commercial Insurance such as general liability protects your business for injury or property damage such as a fire or a customer that slips on a wet floor. There are many different forms of commercial insurance that can protect your company; also there are many endorsements you can purchase to give you and your business peace of mind. With Surety bonds there are no special endorsements that you can buy to protect your business. The surety bond does not protect you or your company but the consumer or the obligee in case of fraud or whatever underlining statue referenced in the surety bond form.
Insurance indemnifies the policy holder and protects your business in the event of insurance claim. A good example of this is D & O Insurance. D & O Insurance protects the personal assets as well as your spouse's assets from lawsuits steaming from wrongful termination, sexual harassment, discrimination based on sex, age race or age. There are no Surety bonds that would cover this.
Surety Bonds indemnify the surety company and protects the consumer or oblige in the event of a claim. In Insurance you pay an deductible and the insurance company covers the rest of the claim up to the policy limits. Also you usually have the option to obtain a higher deducible to obtain a lower premium for your policy. With Surety bonds you do not have any option to have a lower or higher deductible to lower or raise the premium; there are no deductibles. You must also pay the Surety Company back for any claim that was spent by the surety company.
Surety bonds a required by law to obtain a license or to perform government contracts. The government requires performance bond to guarantee that the money for a project will be completed and tax payers will protected. While some Commercial insurance products are required by law such as general liability or workmen's comp, they are not usually required to obtain a license.
Insurance policies limits can be lowered or raised where surety bond amounts are predetermined by the State or Federal Government and the principal cannot change them. Bonds are underwritten similar to a loan where insurance policies are not. Indemnification for insurance policies restore the principal to the financial condition they where in before the time of the loss. Indemnification for the insured in surety bonds restore the surety company to the financial position it was once in before the loss occurred.
I hope this has clarified the vast differences of these two different forms of insurance.
Surety Bond information is hard to come by I hope this has help you with the Surety Bond Process. You can learn more about Insurance and Surety Bond news with future articles
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Types of Surety Bonds for Business
By John Rothschild
There are many different types of surety bonds for businesses. These will vary from state to state in terms of their names, their requirements and specifications, and more. In this quick guide, you'll learn a little bit more about business bonds, why you may need them, and an overview of their various types.
First, why is it important that you have surety bonds for business? They are often a legal requirement of a state in order to conduct business or hold a certain form of license or permit. Therefore, you need them to even begin running your business or pursuing certain professions.
However, in addition to this, many types of surety business bonds will help boost your reputation and trust within the community. Consumers who see that you are fully bonded and insured can depend upon you for actually completing your work, and doing it properly and professionally.
With that out of the way, what types of surety business bonds are available? The quick answer is that there are dozens and dozens of different business surety bonds. Let's discuss a few of the over-arching categories to help give you a better idea.
- Professional licenses: As mentioned, these vary by state, but professional licenses may include a huge range of different careers. You may not only need the license itself, but also the proper bonding to protect yourself as you pursue this career and ensure you stay within regulations.
- Auto Dealers: Auto dealers include many different sub-sets, such as used auto dealers or recreational vehicle dealers. For each one though, you'll like need a business surety bond before you ever open your doors, and these will need to be renewed annually.
- Contractors and Construction: These are some of the most well known business surety bonds. Contractors often advertise being "bonded and insured" as a testament to their reputation and trustworthiness, as mentioned above. Different varieties of contractors, from plumbers to roofers and everything in between, though may need different licenses, and bonds.
- Bids, Contracts and Performance: These are different but related types of surety bonds. Bid bonds lock you into the price you put forth in a project bidding process; contract bonds ensure you fulfill all aspects of a contract, and performance bonds ensure you complete a project and fulfill the performance you set out to do.
That's just the start though. The full list of types of surety business bonds would be massive, and includes a few other popular categories such as telemarketing, seller of travel, Medicare and Medicaid providers, utility companies, title agencies, schools, health clubs, sporting events, promoters and agents, agricultural bonds, financial services, collection agencies, alcohol and tobacco sales, lottery sales, and many others.
Hopefully you've learned a little bit more about the types of surety bonds for businesses which exist today. Be sure to check up with your state's specific regulations and requirements for bonding and licensing for the business you run, or the career you plan to pursue.
John Rothschild is the owner of ACI Insurance Services, a leading provider of Florida surety bonds. ACI is known for their customer service, and their affordable rates, and they'll do everything they can to meet the needs of their clients. Learn how to get started with Florida business bonding insurance by visiting LowCostFloridaInsurance.com or calling John directly at 407.889.2612.
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