If you own or manage a lawn care and landscaping business, you likely prioritize keeping business expenses as low as possible to increase profits. Professional landscapers understand the cost of necessary expenses, including transportation costs, advertising, fuel, maintenance, and more. Another potential requirement you may have is to purchase a surety bond. While landscaping surety bonds might seem like just one more thing that is a part of the cost of operating your business, make sure you understand how surety bonds work and what is required of your business.
What Is a Surety Bond?
Many small business owners think that surety bonds are a type of insurance. However, surety bonds are not insurance and do not protect the businesses or individuals who are required to purchase them. Instead, surety bonds are a type of legal contract between these three parties:
- Principal: The individual or business required to purchase a surety bond
- Obligee: The party requiring a surety bond, which can be a governmental agency or private project owner.
- Surety: The surety company that guarantees the principal’s performance and legal compliance by issuing the bond
Landscaping professionals who are required to purchase surety bonds must sign indemnification agreements through which they agree to indemnify the surety company against any valid claim that might be filed against their bonds. Surety bond applications also must go through an underwriting process, and approval is not guaranteed.
If a surety company agrees to issue the bond, you will receive a quote based on the company’s analysis of the underwriting factors. The governmental agency or a private project owner can file a claim against your bond if you fail to perform the work as promised in your contract or violate the law. While the surety company will step in and pay your claim, you would have to reimburse the surety company or face litigation.
State And Local Laws
Although lawn care and landscaping businesses are not required to be licensed in all states, a majority of states do require licenses for all companies that perform work on projects valued above a certain amount or those that incorporate the application of pesticides as a part of their services. If you are required to be licensed, you will also likely have to purchase a surety bond as a condition of obtaining the license.
Even if your state does not require professionals in your industry to be licensed, some municipalities and counties have their own bonding and licensing requirements. Make sure to check with your city and county governments to learn about any requirements that might apply.
4 Factors Affecting Surety Bond Costs
Surety bonds are issued in maximum amounts based on the project’s size and your licensing requirements. What you will have to pay up front will depend on several factors. However, the quote you receive will be a percentage of the maximum bond amount that you need. The following four factors will influence the surety bond cost for business owners.
1. The Type of Bond You Need
One of the first factors that influence the costs of surety bonds is the type of bond you are required to purchase. Different types of businesses carry varying levels of risk for potential claims. The higher the risk of a surety bond claim, the higher the up-front cost you might expect to pay.
For example, construction companies have a much greater risk of having claims filed against their bonds because of issues that might arise during multi-year projects. By contrast, however, lawn care and landscaping businesses generally face lower potential risks, so their bond premiums are typically lower than for construction contractors.
2. Your Financials And Credit
Your business financials and credit have a large impact on how much you might have to pay to purchase a surety bond. Surety companies issue bonds as a type of credit since the surety company will pay up to the bond’s limit if a valid claim is filed against the bond. When a claim is filed and paid by the surety, the bondholder will then have to repay the claim to the surety company.
Surety companies want to determine how much risk you pose to them if they agree to issue you a bond. Your bond company will want to see documents about your business and personal finances to evaluate risk, including the following:
- Audited business financial statements
- Organizational structure of your company
- Resumes for each shareholder
- List of similarly-sized projects performed in the past
- Business and personal assets and liabilities
- Bank statements
- Tax returns
- Credit score/reports
If you or your business have poor credit, you will be viewed as carrying an increased risk. A surety company might deny your application or quote you a higher premium cost up front. Surety bond premiums typically range from as low as 1% of the maximum bond amount to as high as 15%, depending on the factors considered during the underwriting process and the potential risks the surety company faces if it issues you a bond.
3. Regulatory Requirements
The cost of surety bonds may also be influenced by the regulatory requirements in your state. Some states require individuals to purchase surety bonds in established threshold amounts before they will be issued licenses to operate. If you operate in one state or city, you might only have to purchase a bond with a small maximum amount. By contrast, another state or city might require you to purchase a bond with a much higher maximum amount. The higher the amount of the bond that you are required to purchase according to the regulations in your state or city, the higher the potential cost.
4. Your Need To Finance Your Premium
Some business owners have trouble paying their bond premiums without financing. If you finance the premium of your surety bond, however, it can increase the total cost over time because of interest charges. Naturally, interest charges significantly increase the cost of a surety bond as compared to paying the premium up front.
Lawn care and landscaping business owners can help to decrease their surety bond costs by working to improve their credit and the financial strength of their businesses. Even if you have to pay a higher percentage at first, building a strong reputation with your surety company, improving your credit, and avoiding bond claims can all help lower your costs.
Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he focuses on educating and assisting small businesses throughout the U.S. with various license and bond requirements. Lance graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.
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