Startups involve a lot of planning and organizing before you get to the fun of actually running a business, meeting new clients and connecting with peers in your industry. With all of the money, investments, and infrastructure that goes into setting up a startup, one thing you might miss is the requirement of obtaining a surety bond. Let’s take a look at what surety bonds are and why they are often needed in order to get your business off the ground.
Businesses Needing Surety Bonds
Before you run your own business, there are certain industries that require surety bonds before they become operational. Here is a list of businesses that usually requires surety bonds:
- Auto dealerships
- Collection agencies
- Construction workers or contractors
- Health clubs
- Mortgage brokers
- Notary publics
- Travel agencies
Understanding Bonding for Small Businesses
While some people have the misconception that surety bonds are insurance for a company, the reason why businesses purchase them is actually to protect their customers. Typically, there is an outside agency requiring the business to get one.
From the business’s point of view, needing to obtain a surety bond might seem like an unwelcome expense. However, surety bonds are actually an advantage for your business in that they help prevent unscrupulous companies from existing. There are also surety bonds that protect organizations in the event of employee theft.
If you are a small business or a startup, then you likely have a lot on your plate, as well as a limited budget. It can be tempting in this situation to take on responsibilities that would be better outsourced to a professional. Or while you know it would be prudent to purchase a surety bond, you are avoiding doing so in order to minimize your expenses.
What is a Surety Bond?
To understand the general concepts in and around a bond, you should ensure you understand what is a bond is and how it is used.
A bond (or contract bond) ensures that the obligations of a contract are met and, in cases where they are not, the bond acts as the financial vehicle to compensate your client. A good example, and where it is quite common, is in the construction industry: if your firm does not complete a contracted project, the bond is paid directly to your client. This enables your client to hire another firm to finish the work you started.
A bond is a financial guarantee and is used in cases to ensure that a client of your business is protected from a loss in the event that your business, under contract, cannot – or simply does not – complete the work for which you are contracted. A surety bond, in the case of non-completion, pays out the obligee (the client), on your behalf. therefore, a bond is a financial guarantee for the obligee.
The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation. With other words: the bond provides a guarantee that the bonded company or person will perform its obligations in good faith. Failure to do so may trigger a requirement that the surety company, who provided the bond, steps up in its place. In that case, the surety company is obligated to find another contractor to complete the contract or compensate the obligee for the financial loss incurred.
Why Should I Get Surety Bonds?
There are many benefits of getting a surety bond, more than just complying with state requirements:
Preventing unqualified business owners from entering an industry –Poorly qualified applicants or those with a questionable business history may find it very difficult to get the bond they need to legally operate in their state.
Maintaining industry standards – surety bonds help maintain industry standards by giving consumers a reliable way to make a claim against businesses that provide poor quality goods or services.
Improving consumer confidence in your business – operating a licensed and bonded business is a sign to consumers that you run a strong and reliable company. By providing a clear financial guarantee a surety bond instills confidence in consumers that your business is reputable and secure.
How Much Would It Cost to Get Bonded?
To get a better picture of how surety bonds are priced, it is first helpful to understand a bit about the process, the parties involved, and the respective roles and responsibilities in determining your bond price or premium.
When you first submit an application or request a quote for a surety bond, you are likely speaking with a licensed agent or broker. The responsibility of the agent or broker is to take your application, assist you in the bonding process, answer questions and identify the best surety company to write your bond. Agents and brokers usually partner with several surety companies in order to secure the best prices (lowest costs) for their customers for any specific bond need.
In many cases, the bond cost may be a little higher for these types of applicants. Many insurers will feel comfortable offering a business with several years of successful operation or an owner with many years of experience in an industry a lower bond cost than someone just starting out in a new trade without an established customer base or operation.
On the other hand, applicants with poor or limited credit history may find that their bond costs are higher. Fortunately, there are a growing number of insurers that specialize in working with new businesses and those with bad credit to offer them more competitive pricing.
Be aware that you can seriously harm your company if you are ignorant regarding the areas in which you need outside help. You might make the mistake of taking on more than you can handle or of being unaware of what your insurance does and does not cover.
While a surety bond is technically not business insurance, obtaining one does, in the end, help to protect your assets, in addition to protecting your clients. Depending on your industry, failing to invest in a surety bond could be disastrous for your company.
While the search for your surety bond may seem complex, it’s important to understand which bonds are required of you, what they accomplish and how you can purchase them. By doing this you are ensuring that your business follows all state and federal laws, is properly licensed and ultimately attracts customers.