License & Permit Bonds
License and permit bonds guarantee compliance with local statutes, regulations, or ordinances by the person posting them. In building and development projects, these bonds protect customers paying for work by builders and developers, often allowing activities and projects to proceed.
Who is Involved in a License and Permit Bond?
The contractor or business is the first party involved. The person requiring the bond, typically the customer, is the second party. Finally, the surety bond company is the third party involved. While the customer pays the contractor to perform certain work, the license bond guarantees to that customer that the contractor’s work follows all required government and local regulations. Should the contractor fail to comply, the surety company providing the bond pays the customer for the insufficient work.
This is not the same as commercial insurance. A license bond protects the customer, while commercial insurance protects you, the company, or contractor.
Types of License and Permit Bonds
Depending on the scope of work or project, customers require different types of license and permit bonds. Types of L&P bonds include:
Penalties for Working without a Bond
You operate illegally if you don’t have proper licensing. Without licensing, you risk facing both criminal and financial charges. You also risk a lawsuit from customers against yourself and/or your company if anything goes wrong. Proper licencing helps protect your reputation and company.
What is the Cost of a License and Permit Bond?
In the surety industry, your credit score helps determine your rate. Bad credit equals a FICO score of under 650. With a good credit score, expect to pay 1-3 percent of your total bond amount (sometimes as low as 0.5 percent). With a bad credit score, you pay typically 4-15 percent for a license and permit bond.
For example, a $50,000 license and permit bond costs $500 to $1,500 for those with a good credit score. However, the same $50,000 bond costs $2,000 to $7,500 for those with a bad credit score.
Paying off debt, paying on time, charging less, and correcting any errors on your credit report improves your credit score over time. For more information, please read our article It Is Possible To Improve Your Credit Score For Better Surety Rates.
License or Permit Bond Termination
A license or permit bond carries a term that corresponds with the period covered by the license or permit issued to the principal. The right to file a claim under the bond continues for varying periods, depending upon the issuing state.
Terminating a license or permit bond depends on the following:
- Whether or not termination is allowed by law
- The ordinance under which the bond is required
- The terms of the bond itself