Surety bond applications generally only require a business to submit an application form, supporting documentation, and the premium amount in order for the bond to be underwritten. However, there are some circumstances where a surety may require the applicant to provide a form of collateral to secure the bond. This generally occurs when a surety bond deems that the risk of issuing the bond is too great without the additional protection of collateral.
How does collateral help protect the surety company?
Basically, a surety will use the collateral provided by the bond applicant, known as the bond principal, as a source of money to cover expenses should there be a claim made against the bond that the principal fails to repay the surety for. If a surety bond requires that an applicant provide collateral they will generally issue a collateral agreement that outlines how and when the surety may use that collateral. This helps reduce the amount of money a surety can lose by providing a source of finance to cover the expenses.
Acceptable types of collateral
A surety will only accept certain types of collateral to mitigate the risk of issuing the bond. Most sureties will require one of the following types of collateral:
- Irrevocable letter of credit (ILOC) from a bank: this is a form of credit issued by the applicant’s bank. An ILOC is issued based on the strength of the applicant’s finances and acts as a guarantee that the bank will pay the surety an amount up to the credit limit.
- Money order: a payment order issued by a bank or the post office.
- Wire transfer: funds wired directly to the surety from the applicant’s bank account.
- Cashier’s check: a check drawn directly from the applicant’s bank account.
- Residential real estate: this form of collateral is only very occasionally accepted, the applicant must own the property that will be used as collateral.
The collateral is generally required to be available for the full duration of the bond coverage plus any additional claims periods covered by the bond. Once the surety is released from liability and the collateral is no longer required it will be released back to the bond principal.
Securing a surety bond in your state
Viking Bond Service can help you secure a surety bond in all 50 states. Our licensed bond agents are here to offer expert guidance on all types of bonds, including those that require additional collateral. Call our team today to discuss your bond needs.