Startups and Surety Bonds: Does Your Small Business Have to be Bonded?

One of the common questions of many small business owners — especially those running a service-oriented business such as plumbing, cleaning, landscaping — is whether they need to be bonded. Is insurance enough? Why do they need to get bonded?

Building a startup company or a home-based business takes a ton of work and earnest due diligence. Amid the shuffle among business plans, legal filings and prep work, many entrepreneurs lose track of a crucial tool can easily get lost in the shuffle – surety bonds.

Obtaining the property bonding can make a huge difference when it comes to attracting customers – it’s also often a requirement before receiving a license for scores of business types. Surety bonds are often confused with insurance. But they’re actually three-party agreements that protect consumers and the public at large.

While a surety bond is technically not business insurance, obtaining one does in the end help to protect your assets, in addition to protecting your clients. Depending on your industry, failing to invest in a surety bond could be disastrous for your company.

Surety Bonds 101: A Quick Introduction

Surety bonds are an important part of business. Some professions even require you to take out a surety bond just to work in them. This doesn’t mean that the business and professional world are the only places that surety bonds are used, of course. Before taking out a surety bond, it’s important that you understand exactly what one is and how it works.

A surety bond is an agreement among three parties designed to ensure that the terms of a contract between two businesses or individuals are met. The bond is taken out with a third party, and in the event of an accident or other loss that causes the contract to not be fulfilled, the third party covers the cost of the loss.

The provider of a surety bond, known as a surety agent or bondsman, issues a bond on behalf of one party of a contract. The bond provides a financial guarantee to the other party, ensuring that the party will receive the product, service or action promised by the contract or its financial equivalent. If the surety agent has to pay out on the bond, the party who took out the bond is responsible for repaying the full amount to the agent.

Several types of surety bonds are available for both businesses and individuals:

  • Performance bonds guarantee that a company will complete a project,
  • Bid bonds guarantee that bidding contractors can afford to purchase a performance bond if they win the bid, and payment bonds cover subcontracting costs.
  • License bonds cover the cost of obtaining professional licenses for professions such as engineering and running an auto dealership.
  • Customs bonds guarantee that importers will abide by U.S. laws, and tax bonds guarantee the payment of sales tax.
  • Court bonds and bail bonds guarantee court appearances or the following of court orders.
  • And many more!

If you lack the funding, but still need a surety bond for your business, you should consider the U.S. Small Business Association as a resource. The SBA can use its partnership with the government to assist you financially in applying for one of three types of surety bonds: bid, payment, and performance. You’ll need to apply for a bond with a surety company first and then see if you qualify for assistance from the SBA.

Why Should I Have Surety Bonds for My Small Business?

The fact of the matter is that depending on your industry or company-type, surety bonds might be a requirement. A surety bond may be required if you’re getting a construction license, bidding on a public works project, or part of a specific industry like alcohol and tobacco. You might also willingly get a surety bond to minimize an obligee’s risk.

If you want to bid on public construction contracts and many private contracts, you’ll probably need a surety bond.  For example, surety bonds are mandatory for any federally-financed construction project valued over $150,000 and are mandatory on many state projects as well.  Commercial contracts for manufacturing and service or supply work may also require a surety bond.

If you’re starting a home business or some other smaller venture on construction, plumbing, and the like, surety bonds can mean the difference between failure and success. Consumers gravitate toward guarantees, and printing the phrase “fully licensed and bonded” on your business card gives people significant peace of mind that their interests will be protected.

In conclusion, surety bonds play an important role in protecting project owners and contractors and qualifying sub-contractors. While these three-party contractual agreements can help assure timely and proper completion of construction projects, they are not appropriate for every situation or project.

If you are a startup or small business, there are serious reasons for you to consider getting a surety bond, even if doing so is not a requirement in your line of work. Don’t let the intensity of running a company cause you to overlook something that will safeguard your clients and your own assets.