What is a Business Closing Sale bond ?
Business closing sale bonds are a subset of the broader financial guarantee bond category that must be filed with the government agency (city, county, or state) responsible for regulating tax payment activity in the business owner’s jurisdiction.
Business closing sale bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a business closing sale bond, will also be referred to as the “surety company” or the “bond company”. Business closing sale bonds refer to the business owner as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Business Closing Sale bond required?
Business owners are required to purchase financial guarantee bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring taxpayers are compensated for damages resulting from a business owner failing to pay taxes due as a result of the going out of business sale. The surety company provides the government a guarantee (the surety bond) that the government will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, business owners are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face civil action.
How much does a Business Closing Sale bond cost?
Business closing sale bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 Business Closing Sale Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||1.5%||$150|
|499 or below||10.0%||$1,000|
The actual cost of a specific business closing sale bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the business’s license history, experience and creditworthiness. Business closing sale bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Business Closing Sale Bonds?
Credit checks are required for most business closing bonds.
How does the wording in the bond form impact the cost of a Business Closing Sale bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and closing business owner (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the business owner via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a business closing sale bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 business closing sale bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Business closing sale bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the business owner and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the business owner failing to pay premiums due, claim payouts, or material changes in the owner’s credit score. Business closing sale bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Business closing sale bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.