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.
I can imagine that it could be really helpful for a business to be able to have a surety bond. Making sure that they are bonded by a reputable company could be really reassuring. It was interesting to learn about a small business can apply for a surety bond using the same information that would be applied for a loan application.
It’s also imperative that your new bonding company have a stellar reputation. After all, you’re trusting them with your finances and, essentially, your reputation should there be a claim on your bond. The bond company should be secure, established, and trustworthy above all else. It’s a good idea to ask other companies in your industry about their chosen bonding company, and to also check with the Better Business Bureau to make sure whichever company you choose has a clean history.
Successful business owners can expect to reap substantial gains from their companies and between the business’s equity and earnings, owning your own business can often be the surest path to financial success and prosperity.
Hi,
There can be many reasons for this. If you have to be bound with your small business than i suggest you to read this article carefully as it is really informative and useful. There are many consulting industries that are working to guide you properly in such a bounded situations. The web sites like businessstartups.com, alibaba.com are providing nice solutions. It would be really helpful for you.
Best Regards,
William King
A surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.
A performance bond is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event.
A surety bond may be considered insurance, but unlike insurance a bond does not protect the business it protects the obligee. With insurance you have deductibles, with Bonds there are now deductibles.
Are surety bond costs just based off of credit? The answer is now Surety bond rates are based off of a multitude of factors. Your credit score does play a big factor in obtaining a rate, but experience, how long you have been in business for and your assets all come into play.
Thank you for the information that you listed in your article,it is a big help for me to understand what are the requirements of making bonds and how can you be protected when making a bonds negotiation.
Starting a business is not something you can do overnight. It takes several weeks or even months to get it to the point where you are ready to open for business. You need to do research and I’m not talking just market research but other research as well. In order to be sure that you are operating your business legally, you need to check into local, state, and federal laws regarding your industry. If you want to run your business out of your home, you need to check with the local laws regarding whether or not this is allowed.
Some companies are required to be bonded depending on the industry or trade they may be involved in such as the construction industry.
Some businesses even use the surety bond as a marketing point to convey a certain image to the public. Advertising the fact that you are bonded will give the customer a sense of trust in you and your company.