License and permit bonds

Professionals in many different industries are required to buy license bonds and permit bonds (L&P bonds), which are specialized types of surety bonds. Federal, state, and municipal government agencies determine which professions, such as roofers and notaries public, need a bond to get a license or a permit for their work.

License and permit bonds assure agencies and clients that your business will comply with state laws, local building codes, and other regulations. If the terms of the bond aren't met, the insurer reimburses the agency or client.

Even when they're not required, bonds can help attract clients, who might choose a bonded business over an unbonded competitor. They're a key part of risk management, as they protect clients from financial losses when doing business with your company.

License and permit bonds reimburse your clients if your business does not adhere to certain regulations or standards.

Specifically, a bond can provide coverage when your business fails to:

License bonds and permit bonds can help you get a license, sign a contract, or obtain a work permit.

They're common for many types of businesses, including:

License and permit bonds are common in the construction industry, where they are often needed to get licensed or perform certain types of work. For instance, most states require general contractors to have several years of experience, carry insurance, and buy a contractor bond in order to get their license.

Contractors may need a separate permit and bond to take on a project that requires excavation work, plumbing, HVAC installation, or electrical wiring. These requirements vary by municipality, so make sure to research the laws in your city and county.

Other kinds of bonds are common in construction as well. For instance, you might need a bid bond to bid on a project, a payment bond to guarantee all parties involved in a project will be paid, or a contract bond to sign a contract with a client (also called a performance bond).

Cleaning businesses typically need a license to comply with the laws in their state, county, or city. Sometimes it's necessary to secure a bond in order to get your license. You'll need to check the laws in your area to find out exactly what you need to start a cleaning business.

Additionally, your clients may require you to carry a janitorial bond before they will allow your workers on their premises. The bond guarantees clients will be reimbursed financially if one of your employees steals from them.

Insurance agents and brokers need a license to sell insurance, and can face severe penalties for failing to obtain one. As with other professions, they often need a bond in order to get their license.

The requirements for licensure can include:

• A bond in a specific amount
• Courses
• A test
• A filing fee
• A background check

For example, California requires a $10,000 insurance broker bond before you can get licensed.

In addition to helping you comply with state laws, a bond protects your clients from unethical practices committed by your business, such as selling unnecessary products or manipulating prices. Clients are more likely to work with a bonded insurance broker or agent, as they know their assets are protected.

Depending on their specialty, consultants may need to carry a business license, and obtain a bond to get licensed. Even when it's not necessary, a bond reassures clients that your business is legitimate and could give you an edge over competitors.

Additionally, clients often require consultants to carry a fidelity bond, especially if you work in finance or information technology. A fidelity bond repays the client if an employee at your business steals from them via fraud, embezzlement, or another method.

Both license bonds and permit bonds are common in the landscaping industry.

Landscapers typically need a license bond in order to obtain their landscaping license, and then permit bonds depending on the specifics of a project. In general, whenever you apply for a work permit, it's likely that you need a permit bond as well.

For instance, you may need a bond for:

• Any work that disturbs a certain square footage of ground or changes the grade
• Installing a swimming pool
• Building a retaining wall or fence of a certain height
• Tree removal
• Pesticide application

You'll need to research your state, county, and municipal laws to find out when you need a license, permit, or related bond.

License and permit bonds are crucial for many small businesses, but they don't provide all the protection you need. For instance, these bonds do not cover:

License and permit bonds always involve three parties:

• The principal (your business)
• The obligee (your client)
• The surety (the insurance company)

License and permit bonds are different from small business insurance policies, which pay out claims to the policyholder. Instead, bond claims are paid to the regulatory agency or client that requested the bond.

As part of the application process, the insurer will often conduct a credit check to assess your risk and determine your ability to repay them in the event of a claim. However, this isn't necessary for smaller, low-risk bonds, such as notary bonds.

If your business fails to comply with regulations or other terms of the bond, then the insurance company provides reimbursement. Your business is responsible for eventually paying this amount back to the insurance company.

The only exception is a fidelity bond, which does not require the business owner to repay the bonding company. This specific type of surety bond resembles a standard commercial insurance policy.