What are surety bonds?
- Surety bonds
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.
When do small businesses need surety bonds?
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.
You may need a surety bond to:
- Fulfill a client contract
- Fulfill a government contract
- Legally conduct business in a profession
- Assure clients your business is reliable
Surety bonds help attract clients
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.
Cleaning businesses may need janitorial bonds
Certain professionals may need license / permit bonds
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 differ from most insurance policies
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.
What's the difference between being licensed, bonded, and insured?
A company is bonded when it has a surety bond. It's insured when it has other insurance policies, such as general liability insurance or workers' compensation insurance. Finally, it's licensed when it has obtained the licenses necessary to operate legally.
Surety bond costs
The cost of a surety bond depends on your industry. Construction companies typically pay a higher rate. Other factors that affect the cost include:
- The total value of the bond
- The type of surety bond
- Your personal credit score
- Your financial history