Starting a new company can be a daunting task. There are many things to consider prior to opening for business. It is crucial that all business owners’ know what bonds are needed to operate legally and protect their business. We will review what it means to be bonded, which bonds are required, the benefits of bonding and what you should know prior to purchasing a bond.
What Does It Mean To Be “Bonded”?
“Licensed and bonded” or “bonded and insured” are phrases you might see on the side of a contractor’s truck, on a mortgage broker’s business card, or on an auto dealer’s billboard. They are all using the phrase for a marketing advantage over their competitors to show they are safe to do business with, but what does it mean when companies are bonded, and how does it translate to being safe to work with?
A company that’s bonded has one or both of two very different bond types, surety bonds or fidelity bonds. Let’s begin with surety bonds, which are simply guarantees that obligations will be met. The businesses above that advertise “licensed and bonded” likely have license surety bonds, required by the government to obtain their business licenses and guarantee they will follow license terms. For many business licenses, surety bonds are required to legally operate. When a bonding company (also known as a surety) provides a surety bond to a business, the surety is guaranteeing the business will fulfill its obligations, which vary drastically as there are hundreds of different surety bonds required of a long list of occupations.
The Process Of Obtaining A Surety Bond:
There are many different surety bonds required by local, state and federal governments, and even third party entities. The government or third party entity (the obligee) requires a surety bond of a business (the principal) to legally operate. The principal then obtains the bond from a surety company.
It is extremely important to find out whether you need to obtain a surety bond. Operating without a required surety bond always results in the obligee halting all operations. As mentioned above, surety bonds are often needed to obtain a business license. However, surety bonds are also required outside of business licensing requirements, such as for public construction jobs or occupations that do not require a license. You must verify what type of bond is needed, if any, in order to ensure you continue to operate legally.
What Type Of Bond Do You Need?
As mentioned earlier, when someone wants to “get bonded” they are referring to obtaining surety bonds or fidelity bonds. Now that you understand surety bonds are required to guarantee obligations will be met, let’s move on to fidelity bonds. Fidelity bonds do not guarantee anything. Fidelity bonds are insurance products that protect you or your clients from employee dishonesty such as theft and are usually not required. As an example, if an employee of yours steals from your business or clients and is found guilty, fidelity bonds reimburse any suffered losses.
To summarize, if a bond is required of you by another entity, then a surety bond is usually needed. If no one is requiring a bond and you simply want to protect your business or clients, a fidelity bond would be the right choice. Take a look at our insurance bond guide to determine if you need fidelity insurance or surety bonds.
Benefits Of Getting Bonded
Besides advertising that your business is “bonded and insured” or “licensed and bonded”, the benefits of surety and fidelity bonds are drastically different. Surety bonds benefit and protect the public, not the bonded business. If the business (the principal) fails to fulfill the surety bond guarantee such as not following its business license terms, the obligee (whoever is requiring the bond) can file a claim to recoup any losses.
One might ask how a surety bond is beneficial to their company. Remember, surety bonds are required to legally operate. The alternatives to obtaining a surety bond are either to stop all operations, or acquire an irrevocable letter of credit (ILOC). An ILOC will cost a percentage of the face amount and will require 100% collateral, tying up your working capital. Surety bonds cost a percentage of the required bond amount, but collateral is usually not required. Looking at the alternatives, it is clear that a surety bond can be very beneficial to your company’s operations.
Fidelity bonds can benefit both your business and clients, as they protect against employee dishonesty and are relatively inexpensive. A business service fidelity bond will protect your clients, while an employee dishonesty and ERISA fidelity bond will protect you and your business. Visit our fidelity bond catalog to discover more about fidelity bonds.
What You Need To Know Before Buying A Surety Bond
Surety bonds are not insurance for you; they protect the public. As said earlier, if you don’t fulfill your obligations, a claim will be filed which you will be held responsible to pay.
The bonding company will also require your company and all owners to sign an indemnity agreement to ensure the bonding company is held harmless against any losses you may cause. The agreement cannot be modified and the surety will not bond you if you do not sign.
The bond agency you choose to work with can make a gigantic difference. Choosing the wrong agency can result in slow turnaround time, extra fees and even the inability to get a surety bond.
Whether you need a surety bond, or want a fidelity bond to enhance and protect your business, you can apply directly on our website. If you have any further questions regarding bonding, feel free to leave a comment below, or contact a bond specialist in our office for additional guidance.