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How Do Cannabis Bonds for California Cannabis Businesses Work?

California Cannabis Bonds AKA Cannabis Surety Bonds must be obtained by businesses and organizations who wish to receive a license as mandated by the Medicinal and Adult-Use Cannabis Regulation and Safety Act in California. Though the cost may vary depending on the locality, the state of California requires a $5,000 surety bond.
Each Cannabis bond is underwritten on an individual basis, meaning the cost of the bond varies case-by-case. Generally, the cost of the bond is determined by an individual’s credit score – the higher the score the lower the rate of the cannabis surety bond.

Each surety bond has three sides – the principal (your business), the obligee (the government), and the surety (the third party providing the bond). It’s the job of the surety to assure the obligee that the principal will fulfill their contractual obligations. Cannabis bonds renew on an annual basis and will stay in effect until they are canceled.

How to Get a Cannabis Bond

Before a business owner can obtain a cannabis bond, they must undergo a credit check. This process involves a one-page application that can be submitted online. If the business owner’s credit is acceptable, they can buy the bond instantly. However, if their score isn’t high enough the application will be submitted for underwriting approval where the business owner will either be charged a higher premium or ask for a cosigner.

The requirement for California cannabis bond applications can be found in the Business and Professions Code, section 19322 and has become a necessary aspect of operating in the cannabis industry.

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What are the benefits of getting a cannabis bond?

Cannabis bonds have three primary benefits. First, it provides a guarantee to the obligee that the lowest bidder will complete the conditions of the contract at the quoted price. Second, obligees (the business owner) have the assurance that the contractor has the ability to financially absorb the risks involved with the project.

Third, cannabis bonds ensure that costs will be compensated if the contractor is not able to handle any extra costs associated with the project. Furthermore, cannabis bonds guarantee that suppliers will receive payment for their goods whether the contractor is financially stable or not.

The state of California requires that all cannabis-related businesses carry a bond. Cannabis bonds are $5,000 surety bonds that need to be purchased for each cannabis license the business owner has. If you don’t have a bond your business will be in violation of the Bureau of Cannabis Control’s requirements.

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Tips for Choosing Cannabis Bonds

Navigating cannabis bonds correctly comes down to picking the right type of insurance broker. Here are a few tips to aid you in your search.

Good surety knowledge and relationships

It’s essential you work with an insurance broker that has a firm understanding of how the industry works and who keeps up with industry trends that occur at the local, regional, and national levels. This will make their advice invaluable. It also helps if your insurance broker has a great professional relationship with surety underwriters and other decision makers within the industry.

Highly rated within the industry

Just like other industries, surety bond companies are rated on a grading scale. For example, the highest rating they can receive is A++.  However, not every situation requires such a high rating. There may be instances in which a B+ rating is sufficient. If you know the rating requirement for your situation ensure you find an agent that meets the minimum standard.

Tried and tested processes

Understanding the difficulties you’ll face when procuring a bond will help you to be well prepared for the challenges ahead. A seasoned insurance broker will have tested processes in place to handle every step of the bonding process. These processes should be transparent and should reassure you of the trustworthiness of the broker.

Pick an insurance broker that specializes in cannabis bonds

Picking a broker that knows your industry will guarantee they bring significant value to your partnership. The insurance broker you choose to work with should have extensive knowledge of the cannabis industry and the laws that govern it.

Get a Cannabis Bond for Your Cannabis Business

Are you in need of a cannabis bond, but don’t know how to go about applying for one? We can help. Cannabis Connect Insurance has an in-house bond department with over 25 years of experience. No bond is too small or large for us to handle!
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