Your business needs surety bonds and insurance. What you probably didn’t know, however, is that your business credit may affect whether or not you can secure these important products, and at what price.Tweet This  Here are some other things you may not know about surety bonds and insurance, starting with the difference between them.

Surety Bonds vs. Insurance

Basically, a surety bond is like an insurance policy for your client for a job you are contracted to do, with you paying the premium. If you don’t meet your obligations, the client can recover money from the surety company to hire someone else to finish the job. The hitch for you, however, is you’re still on the hook to repay those losses to the surety company.

Here are a few other ways to think about it:

  • Insurance protects your business, surety bonds protect your client.
  • Insurance is a contract between you and your insurance company. Surety bonds are a contract between you, your surety company and your client (the party that requires the bond).
  • If the surety company pays a claim, you have to reimburse the surety company. When an insurance company pays a claim, that usually comes out of the insurance company’s pocket.
  • While surety bonds and insurance are not the same thing, your insurance agent may be able to sell you both.

What you may not know about surety bonds:

There are many types of business bonds, including several types of surety bonds, so it’s important to understand what the client requires, what you’re applying for, and your obligations under the bond. Also, it’s important to understand how surety bonds work.

Here are a few things to know when applying for a surety bond:

  • Your bond premium is related to your business credit strength and possibly your personal credit score as well. That’s because a surety bond is like a line of credit. The bond company evaluates your credit to determine the likelihood that you’ll complete your contractual obligations, and determine your ability to reimburse them if you don’t.
  • A surety bond is backed by your company’s assets and possibly your personal assets as well. Again, that is because the surety company considers the bond a line of credit. You’re expected to pay back any claims for money paid for work not completed under the contract.
  • The federal government may require companies contracting with them to obtain a surety bond, depending on the contract amount and the type of work or industry.

Getting a surety bond isn’t just about your company’s credit score, though that is important. A surety company will also look at the company’s financial statements, including liquidity. As a small business, you know that losing out on income owed to you or income paid late, can severely impact your own operations. Those customers can put you in a position to default on your own obligations, affecting your credit rating and business stability. Lack of liquidity can also prevent you from getting a surety bond, or getting one at a higher premium.

However, a credit insurance product like Simplicity can protect your account receivables, reimbursing you for much of the loss sustained if you’re not paid what you’re owed. It can also provide an easy line of credit at better rates. Those benefits can positively influence your credit score and financial statements, making you a better risk to a surety company.

What you may not know about insurance:

While insurance is a better understood business product than surety bonds, there’s still some confusion about what factors are considered when underwriting it.

Credit scores may affect the insurance premium and even its availability. Insurance companies want to know a company will pay its premiums, and to understand how risky that customer may be to insure.

Business credit scores can take into account your company’s credit history length, the amount of outstanding debt, bill-paying timeliness and any collection activity.

Obtaining insurance isn’t always optional. It is often part of a company’s licensing requirements, and required by those who do business with it.

Maintaining a good business credit history may have many implications for your company, including what you pay for insurance and surety bonds, and your ability to acquire them. That may also have an impact on getting new business, as clients may require proof of insurance and a surety bond for a project. You can help impact and monitor your Dun & Bradstreet business credit file using CreditBuilder™ or get alerts to changes to your scores and ratings using CreditSignal®*.

Photo Credit: vinnikava, Twenty20