Getting Your New Business Bonded: The Ins and Outs of Surety Bonds

The legal requirements involved in launching a business can seem overwhelming. Even so, it’s a necessary evil to not only become familiar with, but also understand all that is legally required to open a business. Depending upon the business you plan to open, many are required to not only hold a license, but also obtain bonding.


Although bonds work as a safety measure, protecting customers from certain types of malpractice and contract default, they are inherently different from insurance. For those who are required to obtain a bond prior to opening their doors, the following is a look into their function, benefits and how to choose a bonding agency.


What is Bonding or a Surety Bond?


Local, state and federal laws require thousands of business types to be bonded. When a company is bonded, it means that another company called a bonding agency or surety is guaranteeing its performance or financial obligations. If the bonded organization fails to provide business in accordance with their relevant licenses, then a customer can seek restitution. If the customer’s claims prove to be valid, the surety company will be responsible for the payment of damages.


For example, construction companies in almost all cases must obtain construction bonds in order to operate legally in a given jurisdiction. If the crew should default on the contract or fail to pay their laborers, payment will be provided to those parties who were affected by the surety company. Other service organizations such as collection agencies, mortgage brokers and Medicaid companies must also be bonded. The protections the bonds offer to protected parties varies depending on the type of surety bond and for what industry it is being used in.


What Types of Bonds are Required?


The type of surety bond you’re required is contingent upon the line of business you’re in and the services you’re providing. In general, surety bonds are required for service organizations such as: healthcare, construction, dealerships, brokers or distributors. The bonds protect anything from laborer’s payments to upholding terms in a contract or protecting one’s financial assets. Types of surety bonds vary, also, from state to state. Often times, reviewing your state’s legal requirements can help clarify what is expected for bonding your business.


Benefits of Bonding Your Business


One advantage of being bonded is that it demonstrates a level of security and protection for your customers. Individuals are more attracted and willing to do business with companies that provide safety measures and financial safeguards prior to signing a contract. Another advantage of becoming bonded is that it removes the worry of not being bonded. After all, not being bonded is illegal.


Bonded organizations are also seen as more financially secure than their counterparts. Although there are several high risk surety bond programs for those who have less than average financial history, reputable surety bond companies will only sell bonds to those that they know will have the option to repay if a default be filed against them. In this aspect, surety bonds are a way of advertising to your customers that you are a financially strong and independent organization, and can set you apart from your competitors.


How to Choose a Bonding Company


As many struggle to understand the definition of a surety bond as well as what type of surety bond they’ll need, some feel completely lost when it comes to identifying which organization to sign with. As with any financial commitment, a great deal of research should make up the foundation for your decision on which agency to join. One main area to check for is their level of security. Visit each organization’s site and look for the trust badges they have obtained to indicate their site is secure for submission of financial and confidential information. In line with the bonds they provide, many surety agencies are also required to be licensed and certified. The Department of Treasury lists some nationwide surety providers.


Finally, and most importantly, be sure you’re comfortable with their customer services. As the surety industry is still vague and mysterious to some, surety agents should be informed and able to explain the associated costs and types of bonds required of you.


Author’s Bio:

Alex Levin is a marketing specialist for several surety bond agencies. He helps small business owners with their bonding requirements and answers the frequently asked question, “what is a surety bond?”