More than 7 million people work in America’s construction industry. Many will need a contractor license in the state where they live before they can legally conduct business there. In almost all cases, obtaining a contractor license will mean obtaining a surety bond first. Known as a contractor license bond, this is one of the most common (and most misunderstood) hurdles someone must clear before they become a contractor.
The bond experts at Viking Bond Service have created this guide to show you exactly how to get a contractor license bond. We will start by answering some frequently asked questions about this type of surety bond, and then we will cover how to qualify for one.
What is a Contractor License Bond?
Surety bonds hold the bond holder accountable for anything considered misconduct in the bond agreement. In the case of contractor license bonds, if a contractor does not follow applicable state laws, the surety bond holds them liable for any damages that result. It helps to understand the three parties involved in a contractor bond agreement:
- Principal – The contractor who must get the bond and pay for any claims filed against it.
- Obligee – The state agency that regulates contractors. If the principal does something unlawful or unethical, the obligee may file a claim seeking compensation.
Surety – The agency that issues a bond to the principal. If the principal can’t or won’t pay for a claim, the surety will pay a guaranteed settlement. Afterwards, however, the principal must repay the settlement amount to the surety with interest and fees added.
Who Needs a Contractor License Bond?
As a general rule of thumb, anyone who needs a contractor license also needs a contractor license bond. Every state writes different rules for which contractors need bonds and what the license process involves. That being said, most contractors who plan to pursue full-time employment will need a license as well as a surety bond.
Before the state will grant a license, the principal will need to show proof they have a contractor license bond from a reputable surety agency that meets all state requirements. They will also need to keep that bond active and in good standing for the license to remain valid.
At Viking Bond Service, we can help you meet your bond requirement in any state. We provide bonding service via all major surety companies in the U.S. Start your application today.
Why is a License Required for Contractors?
License requirements give state regulators a way to sanction contractors for bad behavior and remove them from the industry when necessary. If someone needs a license to operate a business legally and needs to follow various laws to keep that license, then misconduct that hurts the public could render their license invalid and their business illegal. This disincentive motivates contractors to refrain from misconduct in favor of following any and all applicable rules.
Surety bonds serve a similar function. Since bonds make someone accountable for any damages they cause, the principal has a powerful financial incentive to avoid doing anything that could lead to a claim.
How Much Does a Contractor License Bond Cost?
The cost of a surety bond depends on two factors:
- The size of the bond – States decide how large the contractor license bond must be, which designates the total amount the surety agrees to pay in claims settlements. Totals vary widely between states, but bond costs are usually a small percentage of the bond size.
- The applicant’s credit – Underwriters at the surety agency will examine credit scores and financial histories to decide whether a bond seeker poses a risk for unpaid claims. People with a lower credit standings are considered higher risk and pay higher bond costs as a result.
Do I Need to Renew a Contractor License Bond?
As long as a contractor needs a license he/she needs a surety bond. Contractor license bonds typically expire after 12 months. They must be renewed to keep the coverage active in accordance with the license requirements.
Renewing a surety bond involves a credit check and close look at the business. Underwriters at the surety want to evaluate any changes to the contractor’s credit standing since the last renewal, then adjust the bond cost accordingly. That means costs could go up (if credit declines) or go down (if credit improves) with each renewal.
How Do I Qualify for a Contractor License Bond?
Keep in mind that every surety agency has individual standards for who qualifies and who doesn’t. Some are more risk averse than others. That process starts with an application process involving:
- A credit check.
- An application document that requires information about someone’s background, finances, and business interests.
- A copy of the contractor license bond requirements.
- A financial statement (not always required).
- Any other documents the surety asks for.
With all this information in hand, the surety will determine whether the applicant qualifies for a contractor license bond. Then, the applicant will receive a quote for the bond cost, also known as the premium. After paying to activate the bond for 12 months, the contractor receives a document they can provide the licensing agency proving the contractor license bond requirement has been met.
What If I Don’t Qualify for a Contractor License Bond?
Anyone who has been told by a surety agency that they don’t qualify should not despair. As we said earlier, different agencies have different standards. There are agencies that see an applicant with a credit score below 700 or a blemish on their financial record (e.g. bankruptcy) and automatically reject them. But there are other agencies that take the opposite approach and do everything possible to get people approved.
Viking Bond Service follows the second philosophy. We even offer a bad credit surety bond program to help more people get approved at fair rates. We cannot guarantee that anyone will qualify for a bond. However, we will use all of our resources and connections to explore every bonding option available.
Viking Bond Service – For Contractor License Bonds Nationwide
We serve contractors in all 50 states. Find out if you qualify for a bond by requesting a quote, and expect a response in under 24 hours. You could satisfy your bond requirement in just a day or two! If you have questions or need more information before you purchase for a bond, call us at 1-888-278-7389 or contact us whenever it’s convenient.