Utility Bond

Utility bonds 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 downturns or to go out of business altogether.

Utility bonds are considered to be higher risk than other types of bonds because they involve the possibility of late payments or payment defaults, 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.

It's a good thing to keep in mind that a utility surety bond has nothing to do with protecting the business. The utility company is the party receiving the protection, and the bond acts as a kind of 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 that 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 principal holder of the bond, 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 be in, because not only does it force you to repay the bond amount to the surety company, but it also hurts your chances of becoming bonded again in the future.

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 the business that must purchase bonds, the surety is the insurance company that sells bonds to the business, and the obligee, in this case, is the utility company that requires the principal to purchase utility bonds.

For the most part, utility companies will require virtually all businesses to purchase a bond, since all businesses have the potential to make late payments or default on payments. This means that almost any company that wants to use electricity or water, as well as other public services, must purchase a utility bond before it 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.

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 is 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 percent and 5 percent 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 the bond itself. Other than your personal credit history, other factors evaluated are your business assets, professional experience, and financial security. Any business that appears to be in excellent financial health can expect to pay a lower rate for a utility bond.

If your business doesn't have a strong credit history or even poor credit, it's still possible to purchase a utility deposit bond. However, the utility provider is very likely to impose a higher bond value because you are at greater risk of 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 high, but when you factor in the much greater credit risk of a business that has demonstrated poor credit history, the higher amounts are in line with the greater risk. There are some high-volume surety companies, including NFP, that are willing to work with bad credit risk businesses and get them the bonding they need at the most affordable rates.