surety bond
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By Sarah Jackson

When opening a small business, there’s one thing business owners often aren’t aware of that they need—surety bonds. Surety bonds serve a variety of purposes and are usually required by a government agency in your state or county. Typically, surety bonds are required by law for businesses to be properly licensed. It’s important to understand what bond you need in order to comply with the law and to understand what exactly the bond you are seeking does. Since there are many different types of surety bonds required in the U.S., figuring out what type of bond you need, how you can get it, and how much it costs can be confusing and complex. A breakdown of everything you need to know about surety bonds will help guide you through the process.

What is a surety bond?

A surety bond is a contractual agreement between three parties:

  • The obligee (requires the bond)
  • The principal (needs the bond)
  • The surety  (writes the bond)

The obligee is the entity that requires you to purchase a bond. States and government agencies are the most common obligees. The principal is you, the business owner, who is required to purchase the bond. As the principal, you are responsible to the obligee for fulfillment of business practices. If you fail to comply in any way, the obligee can file a claim against you. If a claim is filed, the surety is the company that backs the bond and provides a line of credit to recover losses, but you are still responsible for repaying the surety in the event of a claim.

Overall, a surety bond protects anyone negatively affected from wrongdoing by a business through recovery of losses and holding the business responsible through the surety company.

Why do I need a surety bond?

The most important reason you need a surety bond for your business is to make sure you are not breaking the law and adhering to the rules and regulations governing your industry. Surety bond requirements are typically set at the state level and mandated by legislation overseeing specific industries. License and permit bonds are usually required as part of the business licensing process. It is illegal to operate your business without a business license, and doing so could result in fines or revocation of your license, restricting you from operating at all.

Being bonded also serves as a great marketing tool for your business. You are more likely to draw in customers when they see that your business is bonded and insured. It gives your customers reassurance that you are reliable and trustworthy, and this can help you win over wary customers and put you ahead of competitors.

How to find the lowest bond rate

To find the lowest rate for your bond, make sure to call multiple surety providers to give you a quote on the bond cost. Surety providers are companies that issue surety bonds and you’ll want to call several to ensure that you get the best rate. To determine the cost of your bond, surety providers work with underwriters and they will often take your credit score into account as well as the risk associated with the type of bond you are wanting to purchase. However, not all bond types require your financial history. Financial factors are more likely to be taken into consideration when the risk of the industry or type of business in which you are operating has greater incidents.

Set your business apart

Purchasing a surety bond may seem like a complicated process, but once it’s broken down, the importance of a bond is quite simple. Purchasing a surety bond insures that you are abiding by all laws and regulations and will ultimately draw in customers to your business. Be sure to look up which bonds are required of you to operate your business within your industry and state.

Sarah Jackson is part of the Educational Outreach Team at works with small businesses and entrepreneurs to help them get the surety bonds they need quickly and easily. Follow us on Facebook, Twitter, Google +, YouTube and LinkedIn.