Surety bonds act as a contract between a business, a client, and an insurance company. They guarantee the insurer will reimburse the client if the business fails to deliver contracted services.
Surety bonds are often required by client contracts or local regulations. A surety bond reassures your client they will be reimbursed by an insurance company if your business doesn’t complete a project, breaks the terms of a contract, or fails to adhere to regulations.
There are several different types of surety bonds. For example, fidelity bonds protect a business and its clients from dishonest employees and license / permit bonds guarantee a business will fulfill an obligation. Read more about what surety bonds cover.
Even when it’s not required, a surety bond is a way to prove your small business is reliable. It may give you an edge over non-bonded competitors, which could make the difference between winning and losing a project.
Depending on your profession, you may need a surety bond to get a business license or a permit. For example, in most states notaries public need to get bonded (obtain a bond) before they can legally go into business. Contractors and construction companies typically need surety bonds, too. The amount is specified by state law.
Surety bonds do not work like standard small business insurance policies, which pay out claims to the policyholder. Instead, surety bond claims are paid to the client. For example, if a construction company fails to complete a project, the insurance company reimburses the client.