5 Things About Surety Bonds that Every Entrepreneur Should Know
Entrepreneurs nowadays have quite a lot on their hands. Even though today’s business environment has a lot of opportunities and potential, there are many factors to consider when it comes to starting a new company. Depending on the industry you want to engage in, there are many moving pieces and legal considerations you must be aware of in order to be successful. It is no wonder that many important details can go under your radar, given the dynamic world we are living in.
When it comes to establishing a new company and getting it off the ground, a surety bond is sometimes the thing that makes a difference. Every entrepreneur out there must know what surety bonds are, when they are needed, and how to get one. In fact, many industries require your business to be bonded — not to mention the benefits a surety bond offers in terms of credibility and brand reputation.
In this article, we will explain what surety bonds are and why they are important. We will also list the most important things entrepreneurs need to know on the topic, including how to get one and what costs are involved.
What Is a Surety Bond?
Surety bonds are often mistaken for insurance — even though both terms have a lot in common, they are actually quite different. Surety bonds are three-party contracts that ensure your business will fulfill all requirements and obligations to both regulatory organizations and customers alike. It is essentially a tool that provides financial protection in case something goes wrong.
The three entities that are involved in a surety bond are as follows:
- The principal is the entity that needs to get bonded — in this case, your new business venture
- The surety company — usually a division of an insurance company that acts as a neutral guarantor
- The obligee is the agency that requires the principal to get a surety bond
If for some reason your business fails to deliver on per-contract obligations or governmental regulations, the obligee (or the customers themselves) can file against your bond. The surety company will then reimburse them, making sure the obligee receives what was contracted.
What Entrepreneurs Should Know About Surety Bonds
Surety bonds are one of those things that you will likely never use — however, simply having them comes with a lot of benefits for you as an entrepreneur. A starting business that is bonded is more credible and trustworthy. Even though your company does not have a history it can rely on, demonstrating a commitment to customer safety is sometimes enough to acquire new clients. Essentially, it shows that you operate with integrity and professionalism.
Besides that, certain industries require surety bonds. Without one, you will have no chance to participate in public bids and win government contracts, for example.
Let’s take a look at the main things you as an entrepreneur should know about surety bonds.
1. The Main Types of Surety Bonds
While there are many types of surety bonds out there, there are three main ones that you should know about.
License and permit bonds – businesses operating in certain industries are required to get these types of bonds in order to operate legally. Auto dealers, general contractors, and freight brokers are just a few examples.
Contractor bonds – businesses wishing to participate in public construction projects are most likely required to get a contractor bond in order to enter the bidding process.
Court bonds – individuals or businesses that are involved in a civil proceeding through a court of law can be required to get a court bond.
2. Which Industries Require Surety Bonds
As we already mentioned, you need to get a surety bond for your business if it operates in certain industries. Here is a list of the most popular industries that require one:
- Auto dealerships
- Collection agencies
- Health clubs
- Mortgage brokers
- Travel agencies
- Medical equipment suppliers
- Notaries public
3. Where to Acquire a Surety Bond
If you want to get a surety bond for your business, you need to find a surety bond company licensed in the state you need to become bonded in. For example, if your business is based in Florida, you need to get in touch with a Florida surety bond company. You need to submit an application and wait for it to be reviewed before getting a surety bond.
4. How Much Does a Surety Bond Cost?
The premium you have to pay for a surety bond depends on several factors. Upon review of your application, the surety company will look into things like your credit rating, business history, overall financial situation, etc. Based on how risky a client you are, the company might offer you a surety bond at a higher price. It is best to be prepared to make the investment, as surety bonds are definitely worth it.
If you are getting a surety bond for a new business, you could also experience higher premiums. After all, you have no business history and can be considered a risky client.
5. What If You Have a Bad Credit Rating?
The good news is that surety bond companies rarely deny applications. Even if your credit rating is bad, it is highly unlikely that your request will be turned down. However, keep in mind that a bad credit rating will definitely result in much higher premiums than the average.
As an entrepreneur, you should keep surety bonds in mind for your current and future business ventures. Even if the industries you are operating do not require them, we advise you to get a surety bond.
Guest post courtesy of Matthew Falloretta