License and permit bonds guarantee that a business will complete a project in accordance with regulations and industry standards.
Professionals in many different industries are required to buy license bonds and permit bonds, which are types of surety bonds. Federal, state, and local 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 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.
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 complete a project in accordance with regulations or standards.
Specifically, a bond can provide coverage when your business fails to:
License and permit bonds reimburse clients if a contractor or other professional fails to comply with federal, state, or local laws. For example, a contractor might fail to obtain the necessary permit for building an addition on a client's home.
License and permit bonds assure clients that your business will comply with local building codes. Violations include improper ventilation, wiring, and failure to install smoke detectors.
If your business is bonded and fails to comply with safety regulations, the insurer can reimburse your client for any resulting fines, replacement work, or other damages.
In some professions, commercial bonds are required to ensure that your work meets the standard of care that's expected by your clients and customers.
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 bonds and permit bonds are common in the construction industry, where they are often required to get licensed or perform certain types of work.
The general contractor buys a $15,000 contractor license bond from a surety company. 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 excavation work, plumbing, electrical wiring, or a building permit. These requirements vary by municipality, so make sure to research the laws in your city and county as well.
Contractors often need other kinds of bonds 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. If one of your employees steals from a client, this type of bond will reimburse the client for the amount that was stolen.
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:
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 an illegal funds transfer or other methods.
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:
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:
Fidelity bonds provide reimbursement when an employee steals from a client. In some professions, your clients may require you to carry this type of bond.
General liability insurance protects against the most common third-party (non-employee) claims, which include accidental damage to client property.
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 bonded contractor or subcontractor over one without this coverage, so it can give your business a competitive edge.
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 is responsible for eventually paying this amount back to the insurance company.