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.
Business owners often need a surety bond when they start working with a large client or a government agency, or when they first start working in an industry that requires bonds.
Read more about what surety bonds cover.
When you first start working with a client, they may ask you to purchase a surety bond in a specific amount before they'll allow workers on their premises.
Even when it’s not required, a commercial 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 and insurance agents need to get bonded (obtain a bond) before they can legally go into business.
Construction companies and contractors typically need construction bonds and insurance, and in some locations, general contractors are required to carry certain licenses in addition to those bonds. The amount is specified by state law.
Wholesalers may also need surety bonds, usually to reassure clients that they'll deliver products as promised in a contract.
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 (also called the obligee). For example, if your small business fails to complete a construction project, the surety company will reimburse your client.
Unlike an insurance policy, you must pay this amount back to the insurer or surety bond company. In a way, a surety bond is more like a line of credit than insurance.
In short, a bond offers a financial guarantee that your company will complete its work as promised.
Surety bonds protect clients from financial loss, which means they may be willing to work with your company even if your business is relatively new. They can rest assured you'll meet contractual obligations, or reimburse them fully if the bond requirements are not met.
Even the most reliable business could suddenly lose a valuable employee, or run out of needed materials due to a supply chain disruption. Surety bonds provide a financial guarantee that your business will do its best to fulfill its obligations.