Bank versus Insurance Company

The Scenario:

You’re building a commercial building on a Deal, NJ property. In order to get a permit, the Township requires you to enhance the intended street site with trees, shrubbery, sidewalks, lights and a parking lot. To ensure you get the job done, they ask you to secure some form of guarantee for the assessed $55,000 cost of the improvements.  A site improvement bond seems appealing. At the same time, the bank where you received your mortgage for the project is asking you for a bond as a degree of protection for themselves as well.  What may seem like convenience, is that the bank offers bonds.

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 So here’s the question. Do you get your bond at the bank or at the insurance company?

It’s actually pretty easy to answer, given the facts:

• Banks often charge 2% interest while locking up your money

• Insurance companies want just a flat fee of about 1.25% per year, while freeing up your money

There’s no gain in acquiring a bank bond. Naturally, you opt for a site improvement bond from an independent insurance agency that can deliver the most for your money.

With such clear logic, why do some people choose a bank bond?

The response to that may seem elementary.  It’s because some folks simply do not know the advantage of the insurance bond over the bank bond.  For someone in the know, however, the entire bond procedure is simplified. Following approval from the insurance company, you receive a bond certification. Once submitted to the Township and bank as a guarantee, you start your project as planned - without collateral and with only an added insurance premium to contend with.

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Summary:

There are two sources that one can acquire a construction bond, also known as a site improvement bond or subdivision bond: a bank or an insurance company. The advantages of acquiring a bond from an insurance company far outweigh those of the bank. While the bank bond involves a relatively high interest rate and locks in your money, the insurance company’s bond frees up your funds and requires a standard premium payment.