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Surety Bonds and Collateral

Surety Bond

If you have decided to apply for a surety bond, the good news is that the bond application process is quite simple. You will be required to fill an application form and provide supporting documentation to a surety company.

Once you’ve submitted your details, the surety company will begin to review your application form. This process involves evaluating your credit score, financial history, the bond amount required, etc. All this information helps a surety company determine your default risk.

That being said, there are some situations where a surety company may ask the applicant to submit collateral.

Collateral 101

Collateral is essentially a security deposit. The bond applicant (principal) will provide collateral to the surety in order to obtain the bond.

When does a surety company ask for collateral? When they believe that the risk of issuing the bond is excessively high. A high-risk principal, such as those with poor credit history, may be required to file collateral. The basic purpose of collateral is to minimize the surety’s risk.

In addition, the surety company will set the terms and conditions of the collateral agreement. They will determine the type, amount and release date of collateral.

In most cases, surety companies do not release the collateral until the obligee signs a written agreement that states that the surety is cleared of all bond obligations.

Different types of collateral

If you are in a financial mess, you may be asked to submit one of the following collateral:

Irrevocable letter of credit

Issued by the principal’s bank, an irrevocable letter of credit is the safest form of collateral. Banks assess the bond applicant’s financial status before issuing them.

Fixed assets

Fixed assets typically include residential real estate. A surety will only accept a fixed asset as collateral if the principal owns it.

Money order, cashier’s check and wire transfer are other forms of collateral.

The collateral remains in the hands of the surety for the entire duration of the bond coverage. However, it is important to understand that collateral is considered as a “last resort” option. Also, different surety companies ask for different types of collateral.

If you are applying for a surety bond with a questionable financial history, we can help you obtain the right bond.

BondPro provides surety bonds across 50 states in the United States. From payment bonds to car dealer bonds, you can count on us for all your bond needs. Contact us to learn more.

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