There are thousands of bonds available. Knowing which one suits your needs is important prior to quoting. Surety bonds are a legally binding contract between three parties: the principal or obligor, the obligee requiring the bond, and the surety party. The surety bond guarantees that the principal satisfies the obligations of the bond, or the bond is “called” in. When a bond is called in it means the bond was cashed due to the lack of completion of duties by the obligor per contractual guidelines.
The main bond types are:
- Performance Bonds
- Bid Bonds
- Payment Bonds
For example, Cannabis Bonds are required by individual states and possibly at the local level. The municipality (city, county, state) is the obligee. Many jurisdictions have implemented bonds to safeguard that licensees follow regulations. These bonds are required to conduct business. Should a cannabis company violate the terms of the license issued by the state, the bond can be called in. The amount of the surety bond varies from state to state and other local governments may require their own. Some cannabis surety bonds cover as low as $5000, and some are as high as $5 million. Consult with the state you are looking to conduct business in prior to submission.
Due to the high-risk perspective as a newer industry in the USA, there are fewer bonding agencies in this space and the bonds are carefully underwritten. All bonds require credit reports to be run, business financials, personal financials, and resumes of officers. Underwriters have the option to ask for any data to support the bond amount and background of the company.
The average surety bond costs are between 1-5% of the issued bond amount. You may purchase in one- or two-year increments typically. Depending on the state, some require bonds to be issued and renewed in perpetuity, and some require bonds to be active only until the first tax return is filed. Pricing is determined by the history of the principal, their financial well-being, and credit rating.
Cannabis businesses that need bonding include cultivators, processors, transporters, pharmacies, dispensaries, testing facilities. Please contact GreenWrap Insurance with any questions.