License and permit bonds guarantee that a business will complete a project in accordance with regulations and industry standards.
Contractors and builders are often required to buy license bonds and permit bonds, which are types of surety bonds. Federal, state, and local government agencies determine which professionals, such as roofers and general contractors, 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 complete a project in accordance 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.
Learn more about what license and permit bonds cover.
Bonds are a necessary part of doing business. Many professions have bond requirements in order to conduct business legally. You might need one to comply with state licensing laws, or to get a work permit for a project.
Bonds show clients you are reliable. Bonding companies evaluate your credit history before issuing a bond, so it helps prove your business is dependable. Your clients also get peace of mind knowing they'll be reimbursed if something goes wrong.
You can take on bigger projects. Small businesses that are bonded and insured can take on government projects and work with larger clients that require certain types of insurance coverage or bonds.
Bonds help attract new clients. Clients may choose to work with a licensed contractor or subcontractor over one without qualifications, so it can give your business a competitive edge.
For example, let's say a general contractor opens up shop. First, they need a license to legally conduct business in their state. The requirements for the license may include:
The general contractor buys a $15,000 license bond from a surety company, paying a percentage of the bond (often only 1%) as a premium. Once they show proof of the bond and pass the exam, they're granted a license to begin work.
In the future, the general contractor may need a permit bond to take on a construction project that requires a building permit, excavation work, or potential damage to streets or sidewalks. These requirements vary by municipality, so make sure to research the laws in your city and county as well.
License and permit bonds always involve three parties:
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.
If your business fails to comply with regulations or other terms of the bond, then the insurance company provides reimbursement. Your business will be responsible then to eventually pay this amount back to the insurance company.