7 Things Entrepreneurs Should Know About Surety Bonds

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Being an entrepreneur is difficult enough in this world. Running a successful business, however, may depend on your shoulders for knowing the basics about surety bonds. Here are several things you need to know.

1. Industry

The industry you’re in plays a large part in launching your startup. Construction workers and contractors need them to bid on public contracts. Without a surety bond, your business won’t last long. You will need a surety bond if your field of work is an auto dealership, travel agency, mortgage broker, notary public, or collection agency.

2. Types of Bonds

There are quite a few distinct contract surety bonds to choose from. There are three primary ones: the bind bond, the performance bond and the payment bond. Which one you should apply for depends on your business.

  • Bind bonds assure that bids are submitted in good faith (and that the contractor will enter the contract at the bided price)
  • Performance bonds protect owners from financial losses (should contractors fail to fulfill the contract’s terms and conditions)
  • Payment bonds assure that workers, subcontractors and material suppliers will be paid by the contractor
Img source: performancesuretybonds.com

3. Bad Credit Score?

While having excellent credit makes it phenomenally easier for you to be accepted, not all surety bond providers will automatically deny you because of your personal credit history. Therefore, before you make a final judgment, figure whether or not the provider you’re dealing with will give you a higher bond premium to pay.

4. Principal Pays Claims

As a surety bond involves three parties (the principal, client, and surety), under the indemnity agreement, the principal is tasked with taking care of any claims made. Claims may arise for any variety of reasons, such as a misunderstanding between the principal and client. When claims arise, If the claim is deemed valid, the surety will pay on behalf of the principal. The principal will then reimburse the surety for the payments made (as well as legal costs).

Img source: businesstown.com

5. Regulations

First: a corporate surety company must be listed by the U.S. Department of Treasury as a certified surety. More importantly, the surety bond provider may give an eligible obligation in place of a surety bond (31 U.S. Code § 9303. (a)). As there are a lot of regulations about sureties and surety bonds, seeking the counsel of an attorney is advisable.

6. Cost

There is a lot of confusion surrounding the full bond amount. Let’s set the record straight: you are not required to pay the full bond amount. All you pay for is the small percentage—called a bond premium—of the total bond amount. Typically, your credit score determines the percentage; the healthier your score, the lower your percentage and vice versa. You may even pay less if you use the Small Business Association’s Surety Bond Guarantee Program.

Img source: king-insurance.com

7. Obtaining a Surety

Once you’ve decided that you do indeed need a surety bond, the next thing you need to decide is how you will pay for surety bonds. If money is tight, your CC company can finance it by putting the full premium on your account. As you can guess: this option is risky, and it is generally less favorable overpaying for the bond upfront.

Conclusion

As much fun as running a business is, and as fun as meeting new clients can be, don’t neglect the value of surety bonds. Whether you’re launching a startup or have been in business for years, they are a necessity. Look at how your business can use them in your industry.



Peter is a freelance writer with more than eight years of experience covering topics in politics. He was one of the guys that were here when the foreignpolicyi.org started.