Commercial bonds are sometimes also known as a license bond or a license and permit bond. They are generally required by government agencies, whether federal, state, or local. Commercial bonds are generally necessary before a contractor can be licensed to do work in a given geographic location, and since it is an annual bond, it must be renewed each year in succession in order to remain valid.
These types of bonds are considered to be low-risk bonds, and for that reason they are both easy to qualify for and fairly inexpensive to acquire. Some good examples of commercial license bonds are auto dealership bonds and contractor license bonds.
Who needs to be bonded?
Since the role played by commercial bond insurance is to guarantee that a contractor will remain in compliance with state regulations that pertain to their specific business, it provides financial protection to the state and its citizens, in the event that any kind of theft, fraud or other illegal conduct is perpetrated by a contractor.
It is entirely up to each particular state to determine which kinds of businesses must purchase commercial bonds and licenses in order to practice within state borders. As a contractor, you will have to check with your state’s specific rules and regulations regarding licensing and bonding with regard to your type of business, in order to be sure of whether or not you are required to be licensed and bonded.
Purpose of these bonds
According to insurance agencies, the purpose of a commercial surety bond is to protect a segment of the public, especially individuals who are conducting business with the principal involved in the bond, (i.e., the contractor). If anyone suffers some kind of damage or financial loss as a result of the principal’s negligence or poor performance, or if someone has suffered a setback due to the non-observance of rules that apply to a given situation, a claim can be made against the principal.
When this does happen, the surety (the company that sold the bond to the principal), would be responsible for paying out the amount of that claim to the claimant. The amount being claimed can either be used to recover from the damage caused by the principal, or it can be used to pay the penalty fees imposed by the governing agency which levied the fine on the principal.
The surety company would then attempt to recover its losses by pursuing the principal and requiring that person to pay the amount of any claim made. It is also possible that the surety company could simply cancel the bond, although there are a number of cases where this is not allowed. It is definitely in the best interests of the involved principal to have all issues resolved expeditiously, because his livelihood may depend on it, since the bond may not remain in active status unless it has been paid.
The penalty amounts imposed on a commercial surety bond can have a wide variance because the reason they’re required can be very different from case to case, and the agency imposing the fines will be different as well. Some penalties are a flat rate when imposed, while others are scaled to match certain conditions, for instance, a percentage of the expected annual sales of a new company.
Other factors include the number of physical locations for a company, the total number of employees working at the company, the volume of transactions over a set time frame, and the exact nature of the business being licensed. Whenever a government agency imposes a penalty on a contractor for violation of a bond, it will provide either a flat-rate amount or prescribe a method of calculating the amount of the penalty.
Some bond prices are the same throughout all 50 states, such as the freight broker bond, which costs $75,000. Most other bonds, however, vary in cost from state to state, and this cost will be determined by each given geographic location. Commercial bond insurance costs can often be quoted without a credit check, and when this is the case, the cost of the commercial bond insurance is generally between 1% and 3% of the face value of the bond itself. For example, if a bond were purchased in the amount of $50,000, and the surety company imposed a 1% premium on the bond, the actual cost would be $500 to the principal.
As a rule of thumb, however, the cost of any bond will depend on three factors: the length of the bond term, the type of bond, and the level of risk being taken by the surety company. Bonds that require the review of an underwriter may be based on the credit history of the involved principal, as well as other personal and professional qualifications. Individuals who are less qualified can generally expect to pay premiums higher than the 1% to 3% rate and may go as high as 5%.
Where to get yours
These bonds must be purchased from a surety company that is authorized to sell them in your particular state. A good place to start your application for a commercial surety bond would be to go online and check first whether a license bond is required for your profession in the state where you do business. If you find that a bond is required in your state, you should then look for a company that is authorized to sell the kind of bond you need. NFP is authorized to sell bonds in all 50 states.
After submitting your application, a background and credit check may or may not be required. If not, you will probably have your bond issued in just a few days. When a credit check and/or background check is necessary, the process takes a little longer, but you should still receive your bond fairly quickly in the mail. Once you have your bond in hand, you are covered and legally allowed to conduct business within the borders of your state.