What Entrepreneurs Need to Know About Surety Bonds

In the U.S, opening a small business or launching a startup takes a vision. However, after you’ve decided on a winning idea, you must follow the proper protocol and submit all the correct paperwork to ensure that you can legally conduct your business. When it comes to various areas of enterprise there are additional requirements you must adhere to. One of these may be obtaining a surety bond, depending on what industry you are in. Here is a list of some of the industries that may require surety bonds:

  • Vehicle dealerships
  • Mortgage brokers
  • Auctioneers
  • Construction
  • Travel
  • Health services
  • Collection Agencies
  • Notary Publics

In many cases and in many states, you may have to secure a surety bond in order to operate your business. For more information on what industries require surety bonds, you can read up on Home Business magazine.

What Entrepreneurs Need to Know about Surety Bonds

Why do you need a Surety Bond?

There are three parties involved in a surety bond contract. The principal, which is the company (or the entrepreneur) that is required to obtain the bond, the obligee (the institution that requires the bond) and the Surety (the bond provider). This agreement ensures that the obligee will deliver on any of the services promised, and will face some form of punishment if they do not. The surety bond protocol is designed to create a more trustworthy business environment and encourage companies to fulfill all of their obligations.

There are many circumstances in which a principal fails to meet the requirements of the state, or their consumer. For instance, if a contracting company violates an agreement, or incurs any unnecessary losses upon the consumer, the consumer can file a claim to attempt to mediate the problem and seek compensation.

In the event of a claim, the surety may encourage the principal to fulfill their contractual obligation before they decide to pay. It is in the principal’s interest to solve this issue before the surety company pays out any compensation.

When a surety bond company is forced to pay a claim, this will typically negatively affect the principal. The principal will have to pay back the surety provider which can be detrimental to their business and can result in a financial catastrophe for the company.

Is a Surety Bond like Insurance?

A surety bond is not insurance, especially not for the company obtaining the bond. In fact, in some ways, a surety bond may feel like a burden or a liability. The surety bond exists as a financial guarantee to protect customers in case anything goes awry. For instance, if their contractor stops responding or their car dealership sells them a broken car, a customer can be reassured via the surety bond company to advocate on their behalf. A surety bond is a necessity in order to run a legitimate business and protect consumers from fraudulent businesses. The surety bond company will assist the customer in their claim and attempt to convince the company to either deliver on their promise or pay up. If a company fails to do so, they will typically be unable to obtain new bonds in the future.

What does a company need to get a Surety Bond?

Entrepreneurs who embark on new business ventures will have to see what the state that they operate in requires. In every U.S state there are different requirements, so it is important to check in with local regulations.

In order to secure a surety bond, you should inquire with a surety bond provider and fill out their application. From there, the provider can advise on the appropriate bond for you. Typically, the application is short and swift and will ask you questions about your business name, business location, bond date and other important details. Often, you will need to undergo a credit check in order to calculate a premium cost for your business. Sometimes, you can get denied if you have a criminal history, submit incorrect information or expired paperwork, so be sure to verify all aspects of your application in advance.

How much does a Surety Bond Cost?

Unlike insurance policies, which usually require recurring premium payment, a surety bond can be secured with a one-time fee. This premium amount and will largely depend on your credit score. The premium can come out to anywhere between 1-10% of the total bond amount. The bond amount is determined by the industry you are in and the size and scope of the contract. If there are no successful claims against your bond, there are no additional costs moving forward. To apply for a Surety Bond, you can fill out an application. You will receive a free quote and once approved, the bond will normally be issued within 24 hours.

Depending on the rules and regulations of your state, you may have to reapply for a surety bond every few years.

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