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A Guide for Entrepreneurs » Small Business Bonfire

Being a successful entrepreneur nowadays is an exceptionally tough job. There are many things to consider when starting a new business — you need to be able to accurately assess, plan, and organize all aspects of your organization. Only then will you be able to get to the fun stuff — managing and expanding your business. All those moving pieces keep entrepreneurs quite busy, so sometimes important details can be missed.

One such essential detail is the surety bond — it is both a requirement and an important instrument in the success of your business. Knowing what surety bonds are, which types of businesses require them, and how to acquire one is a must for every entrepreneur out there. In fact, if you ignore surety bonds in some industries, your business will not last long.

In this article, we will answer some essential questions, such as: what are surety bonds and which types of businesses require them. We will also give you some insight into how to acquire one and the process and costs involved.

What Are Surety Bonds

Many entrepreneurs mistake surety bonds for insurance. While there are quite a lot of similarities between the two, they are not the same at all. A surety bond is essentially an extension of a credit, designed to provide financial protection and ensure you follow through on the obligations of your license.

Surety bonds usually involve three distinct parties:

  • The principal, or the party that gets the license
  • The obligee, which is the Federal or State agency that requires the principal to get bonded in order to provide them with a license
  • The surety company, which is usually a specialized division of an insurance company

If you, as the principal, fail to deliver as per contract or as the result of a violation of laws and regulations, the obligee can file against your bond. It is not unusual for consumers to also file directly against your bond.

There are a variety of surety bonds out there, each with its own specific purpose. Generally, there are three primary types —  payment bonds, bid bonds, and performance bonds.

  • Payment bonds ensure that any workers, subcontractors, and suppliers will receive their pay from the contractor
  • Bid bonds ensure that all bids are submitted in good faith and the contractor will honor the price he bid for the contract
  • Performance bonds are designed to protect owners from financial losses in case the contractor fails to deliver as per contract

What Businesses Require Surety Bonds?

As we already mentioned, surety bonds are a requirement for many industries. If you are not properly bonded, your business will have no chance to qualify for public projects, for instance. It is important to say that for the construction industry, surety bonds are an absolute must if you want to win public tenders and grow your business.

Other industries that require surety bonds include:

  • Auctioneers
  • Mortgage brokers
  • Notary publics
  • Collection agencies
  • Auto dealerships
  • Health clubs
  • Travel agencies
  • Medical equipment providers (when covered by Medicare)

If your entrepreneurial journey has led to one of those industries, you have to acquire a surety bond. Let’s take a look at the specific process you need to complete in order to get your business bonded.

How to Acquire a Surety Bond

The first step, of course, is determining the types of surety bonds your business needs in order to operate. Make sure you do your research and cover all your bases. Keep in mind that surety bonds cost a certain amount of money, so you need to be prepared to cover this investment. If you are short on cash, you can use a credit card to finance it and put the full premium on it. Generally, you need to plan for surety bond costs ahead of time, so you can cover the expense without trouble.

The Process of Getting a Surety Bond

The process of acquiring a surety bond is relatively simple and straightforward. You need to approach a surety company and apply for the bond. The company will evaluate your application, taking into consideration things like your credit, financial strength, and business history. Based on that, your application will be processed and you will have to sign all necessary agreements and pay the premium. The process should not take more than a day to complete, but depending on your situation, it might take more.

Keep in mind that if you have a bad credit or unstable financial history, you might have to pay a higher-than-average premium for your surety bond. If you apply for a surety bond for a new business, you are also likely to get higher premiums. However, surety companies tend to give bonds even to companies with bad financial or credit histories. You can be certain that your application will pass — however, the costs might be higher than what you expect.

How Much Does a Surety Bond Cost?

The cost of a surety bond varies depending on several factors — mainly the type of bond and the result of the evaluation of your application. The difference can be quite significant, especially for applicants with bad credit or financial history. You can expect your premium to be 1%-5% of the face value of the surety bond you are applying for.

In Conclusion

Entrepreneurs should not neglect surety bonds, as they can literally make or break a business. In today’s uncertain business environment, entrepreneurs need to take all the help they can get. Surety bonds are a great way to protect your business — not to mention that they are a requirement for some industries.

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