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Startups and Surety Bonds: Does Your Small Business Have to be Bonded?

One of the common questions of many small business owners — especially those running a service-oriented business such as plumbing, cleaning, landscaping — is whether they need to be bonded. Is insurance enough? Why do they need to get bonded? I’ve invited Kevin Kaiser, a small business compliance expert at nationwide bonding agency SuretyBonds.com  to shed light on what is a surety bond, and why your small business needs to be bonded.

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Building a startup company or a home-based business takes a ton of work and earnest due diligence. Amid the shuffle among business plans, legal filings and prep work, many entrepreneurs lose track of a crucial tool can easily get lost in the shuffle – surety bonds.

Obtaining the property bonding can make a huge difference when it comes to attracting customers – it’s also often a requirement before receiving a license for scores of business types. Surety bonds are often confused with insurance. But they’re actually three-party agreements that protect consumers and the public at large.

What Surety Bonds Do

In essence, surety bonds guarantee that work will be performed according to a contract or to all applicable laws and regulations. If a business fails to fulfill its duty or legal obligation, then the injured party can file a claim against the bond and receive some type of compensation. For example, notary publics in all 50 states must obtain a notary bond before receiving their license. If they abuse their office or somehow harm a consumer, that individual can fail a bond claim and expect to receive appropriate compensation. The surety company that issued the bond is there to ensure the problem is made right.

Many consumers avoid small businesses and home-based companies that lack proper bonding – without it, there’s no guarantee their interests will be protected. A host of other business types either require surety bonds or are excellent candidates. Here’s a look at a few:

• Real Estate Brokers
• Collection Agencies
• Durable Medical Equipment Providers
• Health Clubs
• Auctioneers
• Travel Agencies
• Notary Public

But small businesses can also benefit from non-mandatory surety bonds. Companies with a couple employees – a small accounting firm, for example – can buy Employee Theft Bonds, which insulates them against financial harm if one of their employees steals.

How to Obtain Surety Bonds

Surety bonds are available from surety companies and some insurance carriers that write surety bonds. Small business owners basically apply for a surety bond, including information similar to what might be given for a loan application – extensive financial information, credit history, personal information, volume of business and other key factors.

Surety underwriters typically examine a host of factors when considering an application. In terms of out-of-pocket costs, the bonds themselves typically cost about 1 to 3 percent of the face value. Small business owners with less-than-stellar credit might have to look for surety companies or insurers that specialize in writing high-risk bonds. Those will come with a more expensive price tag.

Why You Shouldn’t Forget Surety Bonds

If you’re starting a Mr. Fix-It-type home business or some other smaller venture, surety bonds can mean the difference between failure and success. Consumers gravitate toward guarantees, and printing the phrase “fully licensed and bonded” on your business card gives people significant peace of mind that their interests will be protected.