How to Obtain a Surety Bond
Obtaining a surety bond starts with understanding the process, and once you do, getting one is often easier than expected.
This step-by-step guide is designed to walk you through the process of securing a surety bond. Whether you’ve been told that you need one, or you’re exploring options for your business, you’ll leave this article with a clear understanding of identifying the right bond type, what information is necessary when applying, and why working with a trusted company like Merchants Bonding CompanyTM can make the ordering process reliable and efficient.
What Is a Surety Bond?
A surety bond is a three-party agreement between the principal, obligee, and surety company that ensures the fulfillment of a commitment or contract. If the principal fails to fulfill the bond’s requirements, the surety steps in to ensure the obligation is upheld or appropriate compensation is provided.
Who’s Who in the Agreement?
- Surety: Obligated to be liable for the performance, debt or failure of a duty of another party.
- Obligee: Protected by the bond. The one to whom the principal, and subsequently the surety, has become obligated.
- Principal: Bound by contract, statute or other means to the obligee to perform or pay a debt.
Step 1: Determine the Type of Surety Bond You Need
The first step in the process is identifying the surety bond type that applies to your profession, project, or legal requirement. Most bonds typically fall into two categories:
Commercial Surety Bonds – These bonds are typically required to ensure compliance with laws and regulations. Examples include license and permit bonds for contractors, court and probate bonds, and notary bonds and fidelity bonds that protect the public or businesses from misconduct.
Contract Surety Bonds – Common in the construction industry, these bonds guarantee that contractors fulfill their obligations and pay subcontractors and suppliers. Examples include bid bonds, performance bonds, and payment bonds.
Step 2 – Find a Licensed Insurance Agent
Partnering with a trusted insurance agent sets the foundation for a smooth bonding experience. Agents are licensed insurance producers or brokers who act as the liaison between you and the surety company. They help you identify the right bond, gather the required information, and submit your application to the surety.
Our Find an Agent tool connects individuals and businesses in need of a surety bond with licensed producers appointed with Merchants, ensuring expert guidance every step of the way.
Step 3 – Apply for the Surety Bond
After locating a producer, the next step will be submitting an application for the bond.
Most applications will require basic business or personal information. Depending on the bond type, other requirements will apply.
For commercial bonds, applications may require only basic information like name contact info, but in other cases a credit check or financial statements may be needed. For contract bonds, applicants are often required to provide financial statements, project details, or references to evaluate risk.
It’s important to note that not all bonds have the same requirements. Smaller, more transactional bonds may only require an application with contact and business details, while larger, higher-risk bonds could involve additional financial evaluation. Each surety provider may vary in the requirements depending on the risk associated with the bond.
Step 4 – Underwriting and Approval
After the application is submitted by the agent, the surety company reviews it through a process called underwriting. Underwriting is how the surety evaluates the level of risk involved with issuing the bond.
For smaller, lower-risk bonds, underwriting may be almost automatic, with quick approvals based on basic information. For larger, more complex bonds, the underwriting is more extensive and needs to be evaluated thoroughly.
The amount of underwriting depends on both the type of bond and the risk associated with it. This step is designed to protect all parties involved - the obligee, the surety, and the principal, by ensuring the bond’s requirements are realistic and backed by the right level of financial security.
Technology Spotlight: Merchants’ Tech Tools
Merchants is committed to providing innovative online bonding solutions to our agent partners. These digital products combine speed and convenience, helping agents expedite the surety bond process.
Step 5 – Paying for Your Bond
Bond premium is the amount a principal will pay for their bond. These premiums are typically a small percentage of the total bond amount, otherwise known as the penal sum or guarantee. The cost can vary depending on the type of bond, the level of risk, and the financial history of the applicant. Surety providers are required to file bond rates with state insurance departments. Each rate is regulated by the department to ensure compliant and transparent pricing.
Unlike traditional insurance, where coverage is designed to protect the policyholder, a surety bond protects the obligee, the entity requiring the bond. Premium amounts are set by the surety and may depend on the bond type, obligee requirements, or the surety company’s schedule.
Reality Check: Bond Prices
Smaller, transactional commercial surety bond premium may start at or under $100, while larger contract surety bonds can cost several thousand dollars or more depending on the size and risk of the obligation.
Step 6 – Receiving and Filing Your Bond
Once your bond is approved and the premium is paid, the surety issues the bond. Today, many bonds are delivered electronically for faster processing, though some obligees still require an original paper bond with a raised seal. In some cases, you may also receive a bond certificate to present as proof of compliance.
The final step is filing the bond with the appropriate authority, whether that’s a state agency, court, or project owner.
Pro Tip: Don’t Skip the Fine Print
Always double-check the filing instructions provided by your obligee. Some will only accept original documents, while others allow digital submissions. Confirming the requirements in advance and filing correctly ensures your license, project, or legal process can move forward without delay.
FAQs: First-Time Buyer Questions
| Who needs a surety bond? |
| Certain professionals and businesses are required to obtain a bond, such as contractors, auto dealers, notaries, and those applying for specific licenses or court actions. |
| What is the importance of surety bonds? |
| Surety bonds build trust by ensuring obligations are met, whether that means following laws, completing a project, or fulfilling a court order. They provide a financial guarantee that protects consumers, taxpayers, and project owners from potential loss while holding businesses and individuals accountable. |
| How are claims handled for surety bonds? |
| If a valid claim is filed, the surety may pay the claimant. The bondholder must then reimburse the surety for any losses. |
| Surety bonds vs insurance: what’s the difference? |
| Insurance is a two-party agreement that protects the policyholder from financial harm. A surety bond is a three-party agreement that provides financial protection to the public or the entity requiring the bond if the bondholder fails to meet the bond’s requirements. |
Why Merchants is a Trusted Market for Surety Bonds
When choosing where to purchase your bond, financial strength and expertise can make a big impact. With over 90 years of experience, focusing solely on surety, Merchants is consistently recognized as one of the nation’s leading providers.
Ranked as a top 10 surety by the Surety & Fidelity Association of America (SFAA) and maintaining an “A” (Excellent) rating or better from AM Best since 1958, Merchants combines expertise, stability, and innovation to deliver trusted solutions to our agent partners.
Next Steps for Bondholders
Every surety bond represents a promise kept - to clients, to regulators, and to communities. With the right partner, the bonding process supports growth, trust, and opportunity and Merchants is here to make that process smooth and dependable. Secure a surety bond today by using our Find an Agent tool and locate a licensed insurance agent near you.
For Agents
If you are a surety producer who is not currently appointed with Merchants but are interested in partnering with us, we’d love to hear from you. Please complete our appointment inquiry form to begin the process.