Follow On TwitterA Start-Ups Guide to Surety Bonds
Every now and then, a reader offers to write a guest post in which I have absolutely no clue about the topic at all. In this case, Matthew Bruns of SuretyBonds.com is here to tell us about Surety Bonds. Most small online businesses probably do not require the use of a surety bond but it’s good to understand what they are and what they are used for.
Starting a business is hard work.
Make your life easier — spend a few minutes ensuring you understand the world of surety bonds. These key risk mitigation tools have become an integral part of the business world, from construction and finance to car dealerships and travel agents.
Bonds can make the difference between a thriving venture and a flailing one.
The Basics on Surety Bonds
Surety bonds are often mistaken for insurance, but they’re actually more like a form of credit. They’re basically an agreement between a principal (the company performing the work), the obligee (the entity receiving the work or requiring the bond) and the surety company that issues the bond. Surety bonds ensure that companies follow contracts and regulations and provide avenues of financial relief if consumers or companies are harmed by a business.
Surety bonds are important for businesses of all stripes. Contractors and construction firms have to purchase contract bonds in order to bid on public projects. Hundreds of industries and fields mandate the purchasing of a surety bond before a state license can be issued. There are thousands of commercial bond types, including:
- Health club bonds
- Travel agency bonds
- Auto dealer bonds
- Mortgage broker bonds
- Auctioneer bonds
- Notaries public
It is also important to note that surety bonds differ from state to state. Differences include the types of bonds offered, the dollar amounts they are offered at, and the types required for specific businesses. For example, a Texas surety bond for motor vehicle dealers may be different than a similar bond offered in another state.
Entrepreneurs may not be able to get their start-up off the ground without a surety bond in hand. In other cases, surety bonds aren’t mandatory but represent a sound investment.
Why Bonds Matter
Small business owners are always looking for ways to distance themselves from the competition. Surety bonds give consumers added protection and provide businesses with a boost of credibility. Telling people you care about consumer protection is one thing — having a surety bond that backs up that statement is something altogether different. Plus, not just anyone can get a surety bond, and the rigors of securing one indicates the relative financial health and legitimacy of a company.
There are also surety bonds dedicated to helping protect entrepreneurs and small business owners. Fidelity bonds can insulate entrepreneurs from financial ruin in the unlikely event their employees steal or somehow break the law or harm consumers.
Surety bonds can help companies attract and retain customers while at the same time safeguarding their interests.
How to Purchase Surety Bonds
Insurance carriers and independent surety companies issue surety bonds. Applicants should expect a process not unlike applying for a loan. Sureties rely on underwriters to examine credit reports, financial records and other important information when considering an application.
Each bond comes with a face value, but that’s not what that applicant ultimately pays. Instead, entrepreneurs are responsible for paying a bond premium, which is usually somewhere from 1 to 3 percent of the face value. Companies and applicants with shaky credit and finances might have to pay higher rates.
More basic bonds can be processed within a few hours. Contract bonds and other, more expensive and intensive bonds may require more time and scrutiny during the underwriting process. Entrepreneurs should shop around for the best rate.
Editor’s Note: In general, most people have probably heard of a bail bond and the concept is very similar. When someone is arrested, a bail bonds company (the surety) puts up the bail money for the criminal (the principal) and provides a guarantee to the government that the criminal won’t run. If the criminal ends up fleeing, the bond company sends out someone like Dog, the bounty hunter to retrieve the criminal.
In terms of businesses, there are many different bond types. For example, if you are a freelancer and offer to provide services to a client for a big project, you can purchase a performance bond. By purchasing the bond, your client is guaranteed compensation for any monetary loss up to the amount of the performance bond if you fail to complete the project to their satisfaction.
I’m not sure how common this is for online businesses however. Matt, would you mind clarifying who the common candidates are for surety bonds in the online world? Is it common for web services professionals to purchase surety bonds?
Question for the readers: Would a surety bond make you more likely to hire someone as a freelancer in the online space? If you were looking for a professional web designer, would being bonded influence your decision?
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If I’m looking for a plumber or a contractor, I always make sure that they are bonded, a web designer? not so much. Though it might affect my decision. Probably a nice thing to have but not required
[...] This post was mentioned on Twitter by mywifequit, Colin Wright. Colin Wright said: Reading: A Start-Ups Guide to Surety Bonds http://bit.ly/d0QHuB [...]
I don’t understand how this whole bond thingy works. If I am unsatisfied with the work of a bonded contractor, what do I do? Do I file a claim somehow? What protection does it really give me or is it one of those badges that everyone has to have for certain industries
I’m with Jerry, some industries rely heavily on surety bonds and others not at all. My understanding, and you guys can correct me, is that surety bonds are usually used in situations in which one party is afraid that it might end up holding the bag for another’s fraud or incompetence, like in your building contractor example or just about anybody who works with cash. It will be interesting to see if this becomes more common for web based businesses.
Glad to get a cursory knowledge here of what Surety Bonds are, I’m agree with some of the other commenters, I wonder how this could positively or negatively effect an online business, and if someone you’ve worked with has one, how do you go about calling it into effect. The more you know…the more you don’t know…so to say.
Thanks Steve,
Surety Bonds are not very common with web professionals such as writers, designers, or programmers. However, once you branch out the category to businesses traditionally as brick and mortar but transformed to a web model you will find that surety bonds will virtually be around every corner.
For instance, a sales tax surety bond will be required in the domicile state of almost any ecommerce site that sells a product and is required to collect sales tax.
Also, service based businesses, using the web as a marketing tool, are oftentimes required to obtain what we call a license surety bond. Whether it be a mortgage broker license bond, a title agent license bond, pay day lender license bond, or notary bond. There are literally thousands of license bonds required by every state in the United States.