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What Entrepreneurs Need to Know About Surety Bonds

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Large business, small business, new business, old business — no matter what type of venture you run, you will need to be prepared for anything. After all, even running a small start-up requires a lot of investment, time, and hard work. Therefore, as an up-and-coming entrepreneur, you will need to do your share of research and figure out everything in order to grow and expand your brand. A key component of that growth is investing in projects securely, with some sort of method of compensation for potential losses. Obviously, most people will think about getting insurance, but you might want to look into a different solution, i.e. surety bonds.

So, what exactly is a surety bond, and should you get one as a business owner? Furthermore, what types of businesses can even get a surety bond? This article is here to help you figure that out. We have covered the basics of surety bonds that any aspiring entrepreneur ought to know before starting a new business venture.

What Are Surety Bonds?

Surety bonds are agreements between three parties, called the obligee, the principal, and the surety. The agreement stipulates that the principal (usually a contractor) has to fulfill all obligations towards their client, i.e. the obligee. The surety acts as a mediator and a guarantor, whose job is to make sure both parties’ interests are met.

The whole point of surety bonds is to create good and honest relations between obligees and principals. If done right, the agreement will ensure that any project will go through without a hitch and that everyone will receive their fair financial share. In addition, surety bonds prevent any single party from participating in any shady dealings, breaking the terms of the agreement, or acting irresponsibly. If the terms are not met, the surety needs to be compensated for the damages and the obligee will require a new principal.

Depending on the situation or the nature of the business, there are many different types of surety bonds. In fact, there are quite literally thousands of them. They are usually classified into four major groups:

  • Contract bonds
  • Commercial bonds
  • Court bonds
  • Fidelity bonds

Contract bonds cover the legal documents between a contractor and a client. Their purpose is to make sure that every legal item in the contract is fulfilled without any issues.

Next, there are the commercial bonds, whose purpose is to ensure that all licensed companies adhere to the laws and regulations of the state related to their dealings.

Then there are the court bonds, i.e. agreements that guarantee compensation in case the obligee suffers a loss of a court proceeding.

Finally, there are fidelity bonds that protect the assets of the company from any employee mismanagement and ensure due compensation for any damages.

Who Requires a Surety Bond?

Nearly every business on the planet can benefit from a surety bond. After all, it is a type of agreement that quite literally has every single party covered. Moreover, it is an easy, flexible method of ensuring your assets without turning to actual insurance (more on that later). Therefore, you might be wondering, “Well, what types of businesses actually require a surety bond?” After all, it seems like the kind of agreement that works better with established businesses and companies.

However, that cannot be further from the truth. Both brand-new startups and established corporate entities can and do utilize surety bonds. Here is a short list of potential parties that most often partake in these types of agreements:

  • Auto dealers
  • Construction work contractors
  • Collection agencies
  • Travel agencies
  • Notaries public
  • Auctioneers
  • Health clubs
  • Medical equipment providers
  • Freight brokers
  • Insurance adjusters
  • Alcohol license holders

Of course, we should point out that most businesses are not required by law to have surety bonds. However, it is highly recommended that you acquire them, simply for safety reasons. Naturally, we advise that you do your due research and figure out which exact type of bond you will need. Remember, there can be as many different variants of a bond as there are businesses and contracts out there.

Surety Bonds vs. Insurance

Based on what the surety bonds accomplish, you might think that they are just a form of insurance. In addition, at first glance, people would agree with you. After all, we use bonds to protect clients against potential risks, just like we would with regular insurance. Furthermore, the United States government regulates surety bonds as a form of an insurance policy. However, that is where the similarities end. Simply put, surety bonds and insurance are two different things.

In terms of understanding surety bonds in this context, it is best to go over all of the differences between them and insurance:

  • Surety bonds protect the party a buyer is working with, not the buyer themselves.
  • In case of damages or misconduct, the insurance company covers the client’s losses, but with surety bonds, the bond buyers have to provide compensation.
  • An insurance premium is used to cover potential losses. A surety premium is merely the guarantee that the principals will fulfill their obligations completely.

How to Obtain a Surety Bond

If you require a surety bond, a surety company can issue one for you. More often than not, surety companies are merely subsidiaries of larger entities, such as insurance companies. That makes sense since both surety bonds and insurance policies are regulated by state insurance departments.

The process of obtaining a surety bond is pretty straightforward. First and foremost, you will need to figure out what kind of bond you need and pay for it upfront. Next, the surety company’s underwriters will require some relevant information. Usually, that involves your financial history, credit profile, managerial team, and maybe even past experience. After reviewing the data, the companies will determine your premium and offer the agreement for signing.

Once you sign, you officially have a surety bond secured. The process is incredibly fast, so much so that you can apply for a surety bond and receive it on the very same day, mere hours apart.

Final Thoughts

Obviously, getting a surety bond as a new entrepreneur will result in high rates, mainly because you do not really have a past credit score history. However, do not let that discourage you. Though you might be paying quite a bit for your premium, the bond itself will make sure that your money does not go to waste. It will, in a sense, insure your assets and you will be able to focus on growing your business with one less thing to worry about.

The post What Entrepreneurs Need to Know About Surety Bonds appeared first on Home Business Magazine.

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