Utility Bonds Definition
Utility bonds are surety bonds which are issued to businesses in response to a requirement imposed by the utility company, before the business would be allowed to make use of that utility’s services. The purpose of utility bonds is to protect the utility provider against the potential for defaulting on payments by the business, especially since there is always the potential for businesses to have severe economic down periods, or to go out of business altogether. Utility bonds are considered to be bonds which have a slightly higher risk than other types of bonds, because they involve the possibility of late payments or defaulting on payments, and this fact generally causes them to be priced slightly higher than other types of bonds. They are often referred to as a utility deposit bond.
Which businesses must buy utility bonds?
As with other types of bonds, a utility surety bond is a contract between three parties, the principal, the surety, and the obligee. The principal is of course the business which must purchase bonds, the surety is the insurance company which sells bonds to the business, and the obligee in this case is the utility company which requires the principal to purchase utility bonds.
For the most part, utility companies will require virtually all businesses to purchase a bonds, since all businesses have the potential to make late payments or default on payments. This means that almost any company which wants to use electricity or water, as well as other public services, must purchase a utility bond before they will be provided with service. This same requirement is not generally extended to homeowners, partly because homeowners do not require the same high volume of service as businesses would, although bonds have been required in some cases of homeowners with poor payment track records.
[If you are ready to get a utility deposit bond, simply call us today, or apply in a minute on our online application. We’ll gladly answer any questions you may have about utility bonds definition or anything else. We’re here to help!]
How they work:
It’s a good thing to keep in mind that a utility surety bond has nothing to do with protecting the business, so if you’re a business owner, the point of a utility surety bond is not to provide any kind of shield or shelter for a business. The utility comp. is the party which receives the protection, and it acts as a kind of a guarantee that utility companies will receive fair value for its services, even if your operation fails to make payments on time or defaults on them altogether.
Whenever a business fails to make its payments on time for several months in succession, utility companies would have the option of making a claim against the bond which was purchased, to receive compensation for its services. If the claim is found to have merit, any amount up to the face value of the bond could be paid to the involved utility company by the surety. However, the principle holder of the bond which is your business, would then be expected to repay that entire amount to the surety company. Obviously this is a situation that no business would want to incur, because not only does it force you to repay the bond amount to the surety company, but it hurts your chances for becoming bonded again in the future.
Utility Surety Bond
When a utility company requires your business to post a utility bond, it will determine the amount of that bond using several guidelines. These will vary from state to state and utility to utility, but the bond amount will be established by the utility company after it takes into account the financial status of your business. The good news is that your business will not be responsible for paying the full amount of the bond premium, but only a specific percentage of that amount.
The cost of a bond will be largely based on your credit history, so assuming that your business has a strong credit history, the cost of a bond would range between 1% and 5% of the face value of the surety. For instance, if you are asked to post a $10,000 utility bond, you would end up paying somewhere between $100 and $500 for a bond itself. Other than your personal credit history, other factors evaluated are your business assets, professional experience, and financial security. Any business which appears to be in excellent financial health, can expect to pay a lower rate for a utility bond.
Utility Deposit Bond
…with bad credit
If your biz is one which does not have a strong credit history, or in fact even has a poor credit history, it will still be possible to purchase a utility deposit bond, but the utility provider is very likely to impose a higher bond value, because you are at greater risk for default. It’s also true that the surety company is likelier to charge you a higher rate for the purchase of that utility deposit bond, for the exact same reason – you are a greater risk for defaulting on any claims made against your bond.
Depending on how poor a company’s credit history is, a business with bad credit can expect to pay somewhere between 5% and 20% of the face value of the utility bond. This may sound a little high, but when you factor in the much greater credit risk of a business which has demonstrated poor credit history, the higher amounts are in line with the greater risk. All this being said, there are some high-volume surety companies such as Surety by NFP, which are willing to work with bad credit risk businesses, to get them the bonding they need at the most affordable rates.
How to get your utility surety bond
It’s a fairly easy process to obtain utility surety bonds for most businesses, since much of the procedure can be done online. For instance, you can go online right now and fill out your application with Surety by NFP, then send in by mail all the required documents, and receive a quote for what your premiums would be. In order to apply for a utility bond, you’ll need to provide the surety company with information regarding the bond amount, the name of the obligee, which is the utility company, and in some cases, proof that your utility bills have been paid and are currently up-to-date. Check out our dedicated liquor license bond page.
The last thing which will be needed is the specific bond form which contains the language and terms of the bond itself. This document will end up providing the basis for the utility bond which is issued to your business. Once all the documentation has been supplied and your bond is paid for, it will then be issued by the surety, and from that point on, your biz would have bonding coverage.
Once a bond has been purchased, it must remain in effect at all times, because the utility comp. will require that to be the case. If coverage for your utility deposit bond lapses, you would no longer have a bond in effect, and the utility provider would more than likely discontinue providing its services to your operation. The good thing is, you won’t really have to remember about renewing your utility bond coverage, because Surety by NFP will do that for you. Several months prior to the expiration date of your bond, you’ll receive a reminder about renewing your bond, and at that time you can renew, and maintain the same continuous coverage.
If you have any questions regarding utility bonds definition, or any aspect of how they work, call us. Only takes a minute to apply online. We’ll be happy to help!