Surety Bonds
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Surety bonds

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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.

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.

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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 attract clients and fulfill contracts

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.

What are the different types of surety bonds?

There are several common types of bonds. For example, fidelity bonds reimburse clients for employee theft. License and permit bonds guarantee a business will comply with regulations and standards during a project.

Chat with a licensed insurance agent if you're unsure what kind of bond you need.

Cleaning businesses may need janitorial bonds

Janitorial bonds are a type of fidelity bond often needed by cleaning companies. If one of your employees steals from a client, your insurance company will reimburse the client up to the bond amount.

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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 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.

How do surety bonds work?

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.

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.

How much do surety bonds cost?

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The cost of a surety bond depends on the size of the bond and your risks. Construction companies typically pay a higher rate. Factors that affect the cost include:

  • Bond amount and type
  • Industry risks
  • Your personal credit score
  • Your financial history
View Surety Bond Costs

Surety bonds are a key part of risk management

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.

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Updated: June 29, 2022
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