Large business, small business, new business, old business — no matter what type of venture you run, you will need to be prepared for anything. After all, even running a small start-up requires a lot of investment, time, and hard work. So, as an up-and-coming entrepreneur, you will need to do your share of research and figure out everything in order to grow and expand your brand. But before you get to the fun stuff, there are also things you will be required to do before you can operate. Depending on your industry, one of those requirements might be to obtain a surety bond.
So, what exactly is a surety bond, and should you get one as a business owner? Furthermore, what types of businesses can even get a surety bond? This article is here to help you figure that out. We’ve covered the basics of surety bonds that any aspiring entrepreneur ought to know before starting a new business venture.
What Are Surety Bonds?
Surety bonds are agreements between three parties, called the obligee, the principal, and the surety. The agreement stipulates that the principal has to fulfill all obligations as outlined in the bond. In some case, the client is the obligee, but more frequently the obligee is a government agency seeking to protect the general public’s interests. The surety acts as a mediator and a guarantor, whose job is to make sure the obligee and general public interests are protected.
The whole point of surety bonds is to create a good working relationship between businesses, consumers and governing bodies. If done right, the agreement will ensure that any project will go through without a hitch and that everyone will receive their fair financial share. In addition, surety bonds prevent businesses from committing misdeeds, breaking the terms of the agreement, or acting irresponsibly. If the terms are not met, the surety will compensate the claimant and be repaid by the principal.
Depending on the situation or the nature of the business, there are many different types of surety bonds. In fact, there are quite literally thousands of them. They are usually classified into three major groups:
- Contract bonds
- Commercial bonds
- Court bonds
Contract bonds cover the legal documents between a contractor and a client. Their purpose is to make sure that every legal item in the contract is fulfilled without any issues.
Next, there are the commercial bonds, whose purpose is to ensure that all licensed companies adhere to the laws and regulations of the state related to their dealings.
Then there are the court bonds, i.e. agreements that guarantee compensation in case the obligee suffers a loss of a court proceeding.
Who Requires a Surety Bond?
Whether you are a brand-new startup or an established corporate entity, you may be required to obtain a surety bond. Here’s a short list of industries that most often require surety bonds:
- Auto dealers
- Construction work contractors
- Collection agencies
- Travel agencies
- Notaries public
- Auctioneers
- Health clubs
- Medical equipment providers
- Freight brokers
- Insurance adjusters
- Alcohol license holders
Naturally, we advise that you do your due research and figure out which exact type of bond you will need. Remember, there can be as many different variants of a bond as there are businesses and contracts out there.
Surety Bonds vs. Insurance
Based on what the surety bonds accomplish, you might think that they are just a form of insurance. And at first glance, people would agree with you. After all, we use bonds to protect clients against potential risks, just like we would with regular insurance. Furthermore, the United States government regulates surety bonds as a form of an insurance policy. However, that’s where the similarities end. Simply put, surety bonds and insurance are two different things.
In terms of understanding surety bonds in this context, it’s best to go over all of the differences between them and insurance:
- Surety bonds protect the consumer and party requiring the bond—not the principal that obtains the bond
- In case of damages or misconduct, the insurance company covers the insured’s losses, but with surety bonds, the principal is required to pay compensation
- An insurance premium is used to cover potential losses; a surety premium is merely the cost of obtaining the bond that is required to conduct business.
How to Obtain a Surety Bond
If you require a surety bond, a surety company can issue one for you. Sometimes surety companies are departments within larger insurance companies. However, a dedicated surety agency can often provide a higher level of service.
The process of obtaining a surety bond is pretty straightforward. First and foremost, you will need to figure out what kind of bond you need and pay for it upfront. Next, the surety company’s underwriters will require some relevant information. Usually, that involves your financial history, credit profile, managerial team, and maybe even past experience. After reviewing the data, the companies will determine your premium and offer the agreement for signing.
Once you sign, you officially have a surety bond secured. The process is incredibly fast, so much so that you can apply for a surety bond and receive it on the very same day, mere hours apart.
