A surety bond is a legally binding three-party agreement in which a surety company guarantees to an obligee that a principal will fulfill an obligation — such as completing a construction project, paying a required tax, or complying with a professional license requirement.
If the principal fails to perform, the surety pays the obligee up to the bond’s face amount, and the principal is contractually required to repay the surety in full. A surety bond is not insurance — it is a form of credit backed by the surety company and secured by the principal’s indemnity.
Most surety bonds cost 1%–3% of the bond amount per year for applicants with good credit (650+), and 3%–10% for applicants with challenged credit. Small license and permit bonds are typically approved the same day. Larger contract bonds requiring underwriting take 3–5 business days.
Below, you’ll find how surety bonds work, what they cost by bond type, and step-by-step guidance on how to get bonded. Prefer to talk to a human? Request a free quote or call (913) 214-8344 — most quotes come back within one business hour.
What Is a Surety Bond and Who Are the Three Parties?
A surety bond is a legally enforceable contract between three parties. Unlike an insurance policy, which protects the policyholder, a surety bond protects a third party (the obligee) from financial loss if the bonded business (the principal) fails to meet a contractual or regulatory obligation.
The three parties to a surety bond
Diagram showing the three parties to a surety bond — Principal (bond buyer), Obligee (protected party), and Surety (bond issuer) — and the flow of premium, guarantee, and claims between them.
PRINCIPAL
You (contractor,
licensee, business)
Buys the bond
SURETY
Surety company
(insurance carrier)
Issues the bond
OBLIGEE
Gov’t agency,
project owner, court
Protected by the bond
Pays premium
(1–3% of bond amount)
Issues bond
(guarantees performance)
Performs the obligation
1. Obligee files claim
If default:
files claim →
Surety pays claim,
then bills Principal
Solid arrows = normal flow. Dashed arrows = what happens if the Principal defaults.
- Principal — The business, contractor, or individual who buys the bond and is legally obligated to perform. (Example: a roofing contractor bidding on a city project.)
- Obligee — The party requiring the bond and protected by it. (Example: the City of Kansas City, which requires the bond as a condition of awarding the contract.)
- Surety — The company that issues the bond and guarantees the principal’s performance to the obligee. (Example: Swiftbonds and our A-rated carrier partners.)
Surety bond vs. insurance — the critical difference
The most common misconception is that a surety bond is insurance. It isn’t. With insurance, the insurer absorbs losses caused by random events (fire, theft, lawsuits). With a surety bond, the surety pays first if the principal fails, but the principal must reimburse the surety in full. A surety bond is closer to a line of credit backed by a guarantor than an insurance policy.
| Feature | Insurance | Surety Bond |
|---|---|---|
| Parties | 2 (insurer + insured) | 3 (surety + principal + obligee) |
| Who is protected | The policyholder | The obligee (third party) |
| Loss expectation | Built into the premium | Surety expects zero losses |
| Reimbursement | None — insurer absorbs | Principal repays the surety |
| Underwriting basis | Risk pooling | Credit + character + capacity |
The four main categories of surety bonds
- Contract surety bonds — Guarantee construction performance. Includes bid bonds, performance bonds, payment bonds, and subdivision bond requirements, which are all types of construction bonds used on public and private building and land development projects. Required on most federal and state construction projects under the Miller Act.
- Commercial surety bonds — Guarantee compliance with state and federal laws. Includes license & permit bonds, tax bonds, and ERISA bonds.
- Court & judicial bonds — Required by courts in civil proceedings (appeal bonds, injunction bonds, probate bonds).
- Fidelity bonds — Protect a business from dishonest acts by its own employees. Technically, insurance, not true surety, is commonly grouped under this banner. For information about premiums, protection, and eligibility, see our Fidelity Bond Cost Coverage & Requirements guide.
Who Arranges and Pays for a Surety Bond?
The principal — the party required to obtain the bond — is responsible for both arranging and paying for a surety bond. The premium is paid to a surety company, which then issues the bond to the obligee (the entity requiring the guarantee). Neither the obligee nor the surety pays for the bond. The full cost falls on the principal, and it does so upfront, before the bond is issued.
How the Payment Works: A Premium, Not a Deposit
Surety bond premiums are structured like insurance payments, not escrow deposits. When you pay 1-3% of the bond amount to your surety, that premium is the cost of the guarantee itself — not money held in reserve for potential claims. It is non-refundable, and it does not accumulate over time. Each renewal period requires a new premium payment based on the same rate structure.
Because the premium is not held in reserve, if a valid claim is paid against your bond, the surety pays the claimant from its own funds first. You then reimburse the surety in full under the terms of your indemnity agreement.
Who Bears the Financial Risk
Every surety bond requires the principal to sign a General Indemnity Agreement (GIA). This document makes the principal — and often the principal’s spouse, business partners, and the business entity itself — personally liable for any losses the surety incurs paying claims. In practical terms, this means a surety bond is not a substitute for insurance. It is a credit product where the surety extends its financial backing to the principal, and the principal remains ultimately responsible for every dollar paid out.
Quick Reference: Who Does What
- Arranges the bond: Principal (you)
- Pays the premium: Principal (you)
- Issues the bond: Surety company
- Protected by the bond: Obligee (the entity requiring the bond — typically a government agency, project owner, or court)
- Held liable for claims: Principal, via the General Indemnity Agreement
If you’re unsure which type of bond you need, or how much your specific bond will cost, request a free quote and one of our underwriters will confirm the requirements for your project or license.
How Much Does a Surety Bond Cost?
A surety bond costs 1%–3% of the bond amount per year for applicants with strong credit, and 3%–10% for applicants with challenged credit. The premium you pay is not the bond amount — it’s the surety’s fee to back you. A $50,000 surety bond at the 1.5% rate, for example, costs $750/year.
| Bond Type | Typical Face Amount | Premium Rate | Annual Cost Example |
|---|---|---|---|
| License & Permit Bond (contractor, notary, motor vehicle dealer) |
$5,000 – $50,000 | 0.5% – 3% | $100 – $500 |
| Performance Bond (construction, service contracts) |
$100,000 – $10M+ | 1% – 3% | $1,000 – $30,000 |
| Payment Bond (protects subcontractors & suppliers) |
$100,000 – $10M+ | 1% – 3% | $1,000 – $30,000 |
| Freight Broker Bond (BMC-84) (FMCSA-required) |
$75,000 | 1% – 10% | $750 – $7,500 |
| Court & Probate Bond (executor, guardian, fiduciary) |
$10,000 – $500,000 | 0.5% – 1% | $50 – $2,500 |
| Notary Bond (state-required for notaries) |
$5,000 – $15,000 | flat fee | $50 – $150 |
| Fidelity Bond (protects against employee dishonesty) |
$10,000 – $1M | 0.5% – 2% | $100 – $2,000 |
Rates assume standard-market approval (personal credit score 650+). Challenged-credit rates (below 650) run 2–5× higher. Multi-year discounts of 10–20% are available on most bond types. Get your exact rate in 60 seconds →
What drives the rate you pay
- Personal credit score — Single biggest factor for license & permit bonds under $100,000.
- Business financials — For contract bonds > $250,000, the surety underwrites the balance sheet and working capital.
- Industry risk class — Janitorial and notary bonds price below construction; mortgage broker bonds price above.
- Claim history — One open claim can double your rate; an unresolved claim can disqualify you.
- Bond term — Multi-year bonds get a small discount; one-time project bonds are priced slightly higher.
Are surety bonds refundable?
Generally, no. The premium you pay is the surety’s fee for issuing the bond, and it is earned at issuance. Some carriers will pro-rate a refund if the bond is canceled in the first 30 days and no claims have been filed. For a detailed look at performance bond pricing, including how premiums are calculated for construction projects, see our complete pricing guide.
How to Get a Surety Bond (Including With Bad Credit)
Most applicants get a surety bond in under one business day. The process is faster and more straightforward than most people expect because licensed surety brokers like Swiftbonds have automated underwriting for most bond types under $100,000.
The 5-step process to get bonded
- Identify the exact bond you need. Your state agency, licensing board, or project owner will specify the bond and its amount. (Example: “Kansas Contractor License Bond — $25,000.”) If you’re unsure, call us, and we’ll look it up against the state code.
- Complete a short application. Name, business EIN, SSN for the owner, and the bond requirement. For bonds under $50,000, that’s all that’s required.
- Receive a quote. For standard markets, you’ll have pricing in 15 minutes to 2 hours. For larger contract bonds, we’ll request two years of business financials.
- Pay the premium and sign the indemnity. Premium is paid up front. The signed indemnity agreement makes the principal (you) legally responsible for repaying the surety for any paid claim.
- Receive the bond. Most bonds are issued as PDF e-bonds delivered the same day. Original-paper bonds (still required by a few states) ship overnight.
Disadvantages and Limitations of Surety Bonds
Surety bonds are essential across construction, licensing, and court settings, but they come with real trade-offs. Understanding these upfront helps you budget accurately, plan your timeline, and avoid surprises during the underwriting process.
- Stringent qualification requirements. Standard-market rates typically require a personal credit score of 650 or higher. Bonds above $250,000 face value usually require business financial statements, a work-in-progress schedule, and personal financial statements from every owner with 10% or more equity. Contractors with limited industry experience may face additional scrutiny or be redirected to the specialty (higher-rate) market.
- Costs beyond the base premium. The advertised premium is the biggest line item, but not the only one. Depending on the bond type, you may also pay a credit-check fee, a filing fee, a courier or overnight-delivery fee, and — for certain court and probate bonds — a filing fee to the issuing jurisdiction. Total out-the-door cost can run 5-15% higher than the base premium quote.
- Approval delays for larger bonds. Small license and permit bonds usually approve within one business day. Performance bonds over $500,000, and any bond requiring full financial underwriting, can take 3-10 business days. Bonds tied to complex or higher-risk projects sometimes require 2-3 weeks of back-and-forth with the underwriter.
- Personal indemnity exposure. The General Indemnity Agreement extends the principal’s liability to personal assets. If your bond pays a $50,000 claim, the surety will pursue you personally for reimbursement, not just your business entity. This is fundamentally different from an insurance policy where the insurer absorbs the loss.
- Renewal risk if your financial profile changes. Rates are reset at each renewal based on your current credit, financials, and claims history. A drop in credit score, a paid claim during the term, or a decline in business revenue can all trigger a premium increase — or, in rare cases, non-renewal.
Despite these limitations, the vast majority of contractors and professionals bond successfully on their first application, and most renewals are routine. If you’d like to see your specific rate before committing to anything, request a free quote — it takes about two minutes and doesn’t affect your credit.
Where to buy a surety bond
You cannot buy a surety bond directly from the carrier — surety is sold through licensed surety brokers and agents. Look for an agent who:
- Is licensed in your state (Swiftbonds is licensed in all 50)
- Represents multiple A-rated sureties (so they can shop your application)
- Specializes in surety, not general P&C insurance (surety is a niche underwriting discipline)
- Has a published phone number and a real underwriter you can speak to
How to get a surety bond with bad credit
Bad-credit applicants are routinely declined by standard markets but approved through specialty programs. Swiftbonds works with carriers that price FICO scores as low as 550. The mechanics:
- Higher premium rate — Typically 3%–10% of the bond amount instead of 1%–3%
- Collateral may be required — Cash collateral or an irrevocable letter of credit, returned when the bond expires
- Personal indemnity required — Spouse may need to sign for community-property states
- No co-signer needed in most cases
If you have an open bankruptcy, an unpaid tax lien, or an unresolved surety claim, the application gets harder but not impossible — call us at (913) 214-8344 for a confidential pre-screen.
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Surety Bond FAQs
Is a surety bond insurance?
No. A surety bond is a three-party financial guarantee, while insurance is a two-party risk-transfer contract. With insurance, the insurer absorbs the loss. With a surety bond, the surety pays the obligee first, but the principal must reimburse the surety in full. Surety underwriting assumes zero losses; insurance underwriting prices in expected losses.
How much does a surety bond cost?
A surety bond typically costs 1% to 3% of the bond amount per year for applicants with strong personal credit (700+ FICO), and 3% to 10% per year for challenged credit. A $25,000 bond at the 1.5% rate costs $375/year; the same bond at 5% costs $1,250/year.
Can I get a surety bond with bad credit?
Yes. Swiftbonds works with carriers that approve FICO scores as low as 550. Bad-credit applicants pay a higher premium rate (typically 3% to 10% of the bond amount) and may be required to post cash collateral that is returned when the bond expires. We have approved bonds for applicants with active Chapter 13 plans, prior bankruptcies, and unresolved tax liens — call (913) 214-8344 for a confidential pre-screen.
What are the three parties to a surety bond?
The three parties are the principal (the business or contractor purchasing the bond and obligated to perform), the obligee (the party requiring the bond and protected by it — usually a government agency or project owner), and the surety (the company that issues the bond and guarantees the principal’s performance to the obligee).
What is the difference between a surety bond and a performance bond?
A performance bond is one specific type of surety bond. “Surety bond” is the umbrella category that includes contract bonds (bid, performance, payment, warranty bond (also called a guarantee bond)), commercial bonds (license, permit, tax), court bonds, and fidelity bonds. Every performance bond is a surety bond, but not every surety bond is a performance bond.
Do I need a surety bond?
You need a surety bond if a state agency, city/county licensing board, federal agency, or project owner has required one in writing. Common triggers include applying for a contractor’s license, bidding on a public-works project, opening a freight brokerage, operating a notary practice, holding consumer funds in escrow, or appealing a court judgment. If you’re not sure whether the requirement applies to you, call us and we will check it against your state code.
Where can I buy a surety bond?
Surety bonds are sold through licensed surety brokers and agents — not directly from the carrier. Look for an agent who is licensed in your state, represents multiple A-rated sureties so they can shop your application, specializes in surety rather than general property and casualty insurance, and provides a direct phone number to a real underwriter. Swiftbonds is licensed in all 50 states and works with more than a dozen A-rated carriers.
Who arranges and pays for a surety bond?
The principal — the party required to obtain the bond — arranges and pays for the surety bond. The premium is paid to a surety company, which issues the bond to the obligee. Neither the obligee nor the surety company pays for the bond. The full cost falls on the principal, upfront, before the bond is issued.
What is the difference between a surety bond and insurance?
Insurance protects the policyholder against losses they suffer. A surety bond protects a third party (the obligee) against losses caused by the principal. When an insurance claim is paid, the insurer absorbs the loss. When a surety claim is paid, the surety pays the claimant first, then collects reimbursement from the principal under the indemnity agreement. Surety bonds are a credit product, not a loss-absorbing product.
Do I need good credit to get a surety bond?
Standard-market rates (the lowest available) typically require a personal credit score of 650 or higher. Applicants with credit scores between 550 and 650 can still get bonded through the specialty market, but premium rates are 2-5 times higher. Below 550, bonding is possible for some bond types with collateral. Bad credit does not disqualify you from being bonded, but it does affect the rate.
What is a surety bond used for?
Surety bonds are used any time one party needs a financial guarantee that another party will fulfill an obligation. Common uses include construction (performance and payment bonds), professional licensing (contractor, notary, freight broker, mortgage broker bonds), court proceedings (probate, appeal, and fiduciary bonds), and government compliance (customs, tax, and utility deposit bonds). Each U.S. state and many municipalities require specific bonds for specific activities.
Can a surety bond be cancelled?
Surety bonds can be cancelled, but the process depends on the bond type and the state. License and permit bonds usually require the surety to give the obligee 30-60 days written notice before cancellation. Contract performance bonds are generally non-cancellable once the project has started, because the obligee relied on the bond in awarding the contract. If you no longer need a bond, contact your surety before the renewal date to avoid an unnecessary premium.
What happens if a claim is made against my surety bond?
The surety investigates the claim to determine whether it is valid under the bond’s terms. If valid, the surety pays the claimant up to the bond’s penal sum (the face amount). The surety then invoices you, the principal, for the full amount paid plus investigation and legal costs. You are contractually required to reimburse the surety under the General Indemnity Agreement. A paid claim will typically affect your ability to secure future bonds and may increase future premiums.