Article Contributed by Kristen Bradley
Starting up a new business is never easy, and it would be nice if you could just skip to the part where your business begins to turn a profit. However, if this were the case then entrepreneurs would miss out on the valuable experience that comes with building their company from scratch. During the first few months, you’ll have to overcome a number of obstacles if you really want to succeed.
Unfortunately, some of these obstacles include legal regulations that seem to be nothing more than arbitrary government-mandated requirements. One such task entrepreneurs often know little about is the need to purchase surety bonds. Being bonded is a legal obligation for businesses in most industries, yet professionals often find themselves asking, “Why do I even need a surety bond?” There are more than a few answers to this question, but the following are some of the most important.
Surety bonds are required by law.
The basic goal behind most surety bond requirements is to guarantee industry regulations are met. Mortgage brokers, auto dealers and contractors are a few professions for which surety bonds are necessary as a business license requirement. Failing to purchase and maintain any necessary bonds can result in heavy fines and license revocation.
Surety bonds provide legally binding financial protection.
Each surety bond functions as a legally binding contract that involves three parties:
- the principal that purchases the bond, which is the professional or business
- the obligee that requires the principal to purchase a bond, which is usually a government agency
- the surety that sells the bond, which is typically an insurance company or a special surety agency
So let’s put this into action. If a contractor leaves a publicly funded construction job mid-project, the government agency overseeing the job can file a claim on the professional’s contract bond. The contractor either has to finish the project according to contract or pay financial reparation so another contractor can take over. If the contractor cannot afford to do so, the bond’s financial guarantee covers the losses.
Customers feel safe working with bonded businesses.
Business owners can also choose to purchase additional surety bonds as a sign of their well-intentioned business practices. Promoting your company as “licensed and bonded” allows customers to feel more confident about your professional reputation. By purchasing a bond you give customers an alternative to the courtroom if an unfortunate situation should arise.
Surety bond premiums are low relative to their coverage.
A surety bond’s cost depends on a number of factors such as your personal finances and credit score, as well as the specific bond type you’re seeking. Premiums typically cost just one to three percent of the total bond amount. This means a surety bond that provides $10,000 worth of coverage only costs $100 to $300.
Getting a surety bond might seem like a hassle at first, but a basic knowledge of the process makes it easier for those looking to get bonded for the first time.
About the Author
This article was provided by Kristen Bradley of SuretyBonds.com, a nationwide surety bond producer that offers assistance to entrepreneurs and new business owners. SuretyBonds.com maintains the Surety Bonds Insider, an online publication that provides an in-depth look at developing policies in the surety industry.