What affects the cost of surety bonds?

Updated Dec 6, 2018

Eye glasses and fountain pen on top of paperwork discussing surety bondsAs a business owner, one of the main priorities of running a successful operation is keeping expenses low. Profitability can come in a variety of forms but paying close attention to the bottom line is crucial for sustained success.

This is especially true for professional landscapers, no matter how long they have been in business. One of the strategies landscaping business owners can use to keep a lid on expenses is understanding the cost of required expenditures, including surety bonds. However, surety bond pricing can be complex, particularly for newer companies.

To help ensure the required expense of a surety bond remains as low as possible, it is helpful to recognize the four factors that drive cost.

Here’s what business owners in the landscaping industry need to know about the type of bond they need, government regulations, personal and business financials and financing needs.

The bond type

The first factor driving surety bond costs is the type of bond required. Each business operates in a unique way depending on the type of industry it falls into, and not every company needs a surety bond to do so. However, the businesses that do need surety bonds have different prices based on the type of work performed. The greater the risk of a claim against the surety bond, the higher the price may be.

For example, a notary may need a surety bond, but the risk of a claim is minimal. A licensed contractor, on the other hand, is likely required to have a surety bond in place because of the nature of the work performed. Because of the increased risk construction work presents to contractors, vendors and the job owner, surety bond prices are often higher. For landscapers, potential risks are not as high, meaning the cost of bonds are lower in most cases.

Government regulations

Another force behind surety bond pricing involves the specific government regulation in play, based on the type of work the business owner conducts. Surety bond amounts differ from state to state and from municipality to municipality, in addition to vast differences by industry. One state or city may require a minimal bond amount for a contractor or other licensed landscaping business owner, while another may mandate three or four times the surety bond amount. Landscapers should recognize that, depending on state or municipal requirements, the higher the bond amount required by law, the higher the potential cost.

Personal and business financials

While bond amounts and the type of work performed have an influence on surety bond prices, financial history plays the most significant role in the cost. Surety agencies that offer bonds to business owners are extending a form of credit. This is because when a claim against a bond is made, the surety agency pays up to the limits of the bond to the individual or entity bringing the claim. Then, the bondholder is required to repay the claim amount over time.

If a business owner has a spotted financial history, either personally or through the company, surety agencies see this as an increased risk to their bottom line. Because of this risk, the cost of a surety bond is higher than if the business owner has a clean financial track record. Before applying for a new surety bond, be sure to check personal and business credit, and have financial ducks in a row to ensure the lowest possible cost for the bond.

Financing needs

Depending on the cost of the surety bond, some business owners may find it difficult to pay the premium without financial assistance. Getting financing for a required surety bond is not uncommon, but it can drive up the total cost of the bond over time. Financing often includes interest charges, spread out over the course of several months. These charges can add up to a significantly higher cost than simply paying for the bond premium up-front. It is necessary to understand these nuances before selecting financing as an option for a surety bond premium payment.

Business owners in the landscaping industry can help reduce the cost of a surety bond by understanding these driving factors. While the amount of the bond and the bond type cannot be changed, paying close attention to their financial strength and credit history while understanding financing expenses can save on this mandatory expense over time.

EDITOR’S NOTE: This article was written by Eric Weisbrot. Weisbrot is the chief marketing officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

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