A Quick Guide to Small Business Surety Bonds

This is a guest post by SuretyBond’s Matt Bruns.

Surety bonds are an important tool for US small business owners. But they often get overlooked, unless they’re required by law.

That’s unfortunate. Entrepreneurs stand to reap significant benefits from the protection and credibility that stem from proper bonding.

Surety Bonds: A Quick Primer

Surety bonds are risk-mitigation and management tools more like a form of credit than insurance. They’re required to secure state licensing for scores of industries. They’ve also become a key component of the construction field, helping to ensure projects are completed, subcontractors are paid and contracts and regulations are followed. Surety bonds are basically three-way agreements among a principal (the company or person doing the work), the obligee (the entity receiving the work or issuing the license) and the surety company.

The bond ensures that work or services are provided as spelled out by regulation, contract or law. They also provide consumers and other stakeholders with a way to recoup funds in the event they’re harmed by the bonded business. For example, surety companies can step in and make sure construction projects are completed or developers are compensated.

But they’re equally important for small business owners and entrepreneurs. In some cases, business owners can’t obtain a state operating license until they have proper bonding. Some of those industries include:

-Notaries public

-Mortgage brokers

-Health clubs

-Auto dealers

-Durable Medical Equipment providers (DMEPOS)

-Telemarketers

-Title agencies

Bonds can also be crucial for entrepreneurs who aren’t mandated by law to purchase them. Fidelity bonds and Employee Theft Bonds protect business owners from harm if their employees break the law or harm consumers.

Entrepreneurs can also use surety bonds as a competitive advantage — they help boost consumer confidence and showcase a business’ desire to protect consumers and its ability to qualify for a bond. Surety bonds can help set a business apart.

How to Purchase Surety Bonds

A surety bond can be obtained from insurance companies and independent surety companies. Applicants have to provide financial information and credit documents. Some bonds are easy to obtain and require little in the way of underwriting. Others take more time and require a much more detailed analysis.

Bond costs will vary depending on a host of factors, including the bond type and the applicant. In general, premiums tend to range from 1 to 3 percent of the bond’s value. There are cases where an applicant’s credit or financial standing bumps them into a high-risk category, which will lead to higher rates and premiums. Another factor affecting cost is the state the bond is purchased for. For example, the cost of a Missouri surety bond for auto dealers may be different from the cost of an equivalent bond in another state.

For everyday entrepreneurs, securing a surety bond can take just a matter of minutes at a minimum cost. In turn, that bond can generate significant peace of mind among prospective consumers.

This is a guest post from Matt Bruns of SuretyBonds.com, a nationwide surety bonds company, as part of their surety bond education program.