Commercial Bond

You need to understand what bonds are and how they work to fulfill state-mandated bond requirements. This glossary entry introduces you to one of the most common types of surety bonds – a commercial bond.

What is a Commercial Bond?

Bonds are often required for obtaining professional licensure from a federal, state, or local agency. A commercial bond is simply any bond required of a commercial business, from a car dealership to a general contractor. Considering that 22% of all employed people in 2015 needed a license according to the Bureau of Labor Statistics, a large number of people will need bonds as well.

There are three parties in all bond agreements. First, you are the principal, meaning you're required to obtain the bond and pay for any claims filed against it. Another party is the obligee, which is whatever agency creates and enforces the bond requirements. Lastly, the surety is whatever company issues your bond.

Bond requirements exist to protect the public from businesses that break the law. If and when this happens, an individual can contact the obligee to file a claim. If investigators determine the claim is valid, the individual can collect compensation from the surety, up to the total penalty of the bond. After paying, the surety will attempt to collect the amount of the claim from the principal. If the principal refuses to pay or has numerous claims filed against it, the surety has the right to cancel the bond, potentially invalidating your professional license.

How Much Does a Commercial Bonds Cost?

Many different types of bonds meet the commercial bonds definition, but each has its own required minimum limits. For example, car dealers in Illinois need a $20,000 bond, compared to certain types of Florida general contractors who need a $10,000 bond. Bond premiums are a small percentage of the bond total, and the amount you actually pay is based on your credit risk. Most bonds are active for a 12-month period (though there are exceptions) before they must be renewed. As long as no one files a claim against the bond as a result of illegal behavior on your part, paying the premiums are the only cost.

How Much Do Claims Cost?

It all depends on the type of bond and the nature of the claim. Some bonds have set penalty amounts, meaning that any infraction carries the same fine. Others have a scaled amount, or penalties based on earnings. Bonds will initially pay for the cost of claims, but you, the bonded party, must always pay the surety company back. Plus, if claims exceed the bond total, the principal must make up the difference. Claims are expensive and the cost is unavoidable, creating a powerful incentive for anyone with a commercial bond to follow the strict letter of the law.

How Do You Obtain a Commercial Bond?

Businesses in commercial industries can't obtain a license or operate legally until they obtain a bond. Finding a reputable company to work with is the first priority. Not all surety companies issue all types of bonds, and not all bonds will meet the legal requirements. Contact the obligee and the surety to determine exactly what you need and exactly what is available. Bond applications will ask for financial information from you and any other partners in the business. Underwriters then use this information to evaluate your credit risk and calculate your bond premium. The bond is active once the premium is paid.

Viking Bond Service can help you obtain a wide range of commercial bonds. Complete our online application at your convenience, or contact us to learn more about what is a commercial bond.