Surety Bonds for Small Business

Surety bonds are especially important for small businesses hoping to do business with the federal and state governments. They are also common in the construction and finance worlds. The essence of a surety bond is to guarantee small businesses complete the work they are contracted to do, and to protect customers against a transaction.

For example, imagine you own a small paving company. You win a bid to reopen all parking spaces at the nearest public university. The state will ask you to buy surety bonds before you start work. This way, if your small business disappears overnight in the middle of a job, the state will pay for their investment.

Today we’ll cover everything you need to know about surety bonds, such as:

  • Different types of surety bonds
  • Costs associated with surety bonds
  • SBA bonds
  • Difference between licensed, bonded and insured organizations

But before we get into all that, let’s answer the most common questions asked about surety bonds for small businesses:

“Does My Business Need to Be Tied Up?”

Generally, no. If you no in the construction sector, and you no win an offer to work for the US government, you may not need a guarantee. The average retailer, restaurant, website designer, or photographer needs no guarantees to operate.

But a website developer implementing a website for a bank, landscaping company working on government land, or any construction company will need it.

Who was involved?

Exist three parties involved in a surety bond agreement:

  • Principal is a small business looking for surety bonds.
  • liability recipient is a company/organization that requires a contractor to be bound.
  • guarantor is an insurance company that guarantees bonds.

if Principal failed to finish the job, guarantee will pay back must.

Principal Mandatory Guarantor
· A small business looking for a bond guarantee

· Construction company

· Businesses that may be dealing with sensitive information

US federal or state government seeking contractors

· Main contractor seeking assistance from sub-contractors

· Financial institutions

· Bond providers, often insurance companies

Now, let’s think about the different types of surety bonds.

Different Types of Surety Bonds

There are several types of surety bonds. Common ones include:

  • Contract Bonds: A contractual guarantee bond ensures the business owner will fulfill all the terms of the agreement and perform the work specified in the contract.
  • Bond of loyalty: Small business owners use these bonds to protect the business from financial loss. They can protect against losing clients’ money, for example, or against financial losses caused by employees committing fraud.
  • Business service association: If your small business works in the financial world, and there may be opportunities for your employees to commit fraud (such as a website design company building databases for banks), a business service surety bond will protect your customers.

There are also a variety of other bonds, such as mortgage broker bonds, gym/health spa bonds, real estate agency bonds, and fuel tax bonds, aka “IFTA.”

Surety bonds are sold by insurance agents who specialize in them, insurance companies, and they are also available online. The process is like buying insurance. You have to fill out an application, and it will go through the underwriting process. If you need a surety bond insurance quote, click here.

Bonds exist in the private finance world too, and while this doesn’t apply directly to the concept of surety bonds for small businesses, you should know that bonds exist.

How Much Do Surety Bonds Cost for a Small Business?

It depends on the size of your bond and small business credit. Almost always, the price you pay for a surety bond will be based on your credit. A good price is 1% of the bond – or $1,000 for every $100,000 covered. If you have very good credit, you can expect to pay somewhere between 1% and 3% of the bond.

Unfortunately, not every small business has great credit. It can be challenging for young businesses with limited credit histories to pay for the bonds they need to handle government jobs.

US Small Business Administration (SBA) can help small businesses with less than perfect credit find the bonds they need to work directly for the federal government, or as subcontractors.

SBA Bonds

The US government encourages prime contractors to work with small businesses as subcontractors. The big players in the defense industry, companies like Lockheed-Martin and Boeing for example, are required to spend money millions if not billions dollars each year with small businesses.

  • A small business that has nothing to do with the defense industry may find itself seeking guarantees to work for a prime contractor.
  • A small cleaning business, for example, might need to be tied down to cleaning field offices for a company like Boeing.

But if the small cleaning company doesn’t have good credit, they may struggle to find surety bonds. The SBA can help businesses in this position. However, bond prices may be high.

Small businesses with poor credit can expect to pay 10% on surety bonds (that’s $10,000 for every $100,000 on surety bonds.)

Lastly, let’s talk about what it means to be “licensed, bonded and insured”.

What Does “Licensed, Bonded & Insured” Mean?

We hear these terms thrown around lightly sometimes, but they shouldn’t!

  • Licence varies from one industry to the next. Here in the insurance world, for example, a licensed insurance agent must pass a rigorous background check, pass a state-mandated exam, pay for a license, complete continuing education every year or two, and usually pass some sort of pre-licence class, before getting a fingerprint. finger – all at your own expense.
  • bound means the company has a special surety bond to complete the contract. So if a salesperson approaches you and claims their business is “bound” it doesn’t mean much, because a surety bond only covers the three parties we discussed above.
  • Insured means small businesses carry insurance, and this can vary from industry to industry as well. Business owner insurance is meant to protect the insured, not the customer.

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