What Small Business Owners Need to Know about Surety Bonds

Surety bonds are often associated with insurance, owing to the fact that bonds are sold by insurance agents and are designed with loss coverage in mind. There’s a vital difference, however, between surety bond insurance and regular insurance. Here’s what you need to know about surety bonds.

What Is It?

The purpose of a surety bond is to ensure contract completion in the event of contractor default. They’re obtained by contractors in case of the default, in order to make sure that the surety company finds another contractor to complete the contract, or give refund to the project owner. Four types of surety bonds exist:

1. Bid bond, which ensures that the bidder will enter into the contract and furnish the necessary payment(s).

2. Payment bond, which ensures that subcontractors and suppliers earn their wages for the work they’ve performed.

3. Performance bond, which ensures that contract is completed as dictated by the terms and conditions of the contract.

4. Ancillary bond, which ensures that contract-integral requirements, which aren’t related to performance, are performed.

Surety Bonds that Various Small Businesses Might Need

There are 25,000 types of surety bonds out there, with regards to the business type. All of these cannot be covered in a single article, so we’ve decided to address 5 types that a variety of small businesses might need:

Surety bond insurance for notaries – With legal authority to authenticate documents in many business and legal dealings, their integrity is extremely important. Notary surety bonds protect businesses from unethical notaries. Notary bond insurance works as a condition of licensure that a notary must meet before moving on to conducting notary services. These are somewhat inexpensive and therefore are widely used.

Surety bond insurance for construction – Contractors are often required to have a Licence and Permit or a Performance Bond, the former often before even getting a licence. These are used to protect businesses from financial losses. This type of surety bonds also aren’t pricey and are used widely. When it comes to Performance Bonds, these are somewhat more job-specific and are related to the performance of the contract; whether it comes to meeting a deadline or not going over the budget.

Surety bond insurance for cleaning business – Seeing as how cleaning professionals regularly enter properties and are usually alone in their time of doing business, which gives them access to potentially valuable goods. A Janitorial Service Bond protects businesses and homeowners from theft, when it comes to janitors and cleaning professionals. This is why most businesses and homeowners look for cleaning services that are “bonded and licenced”, in order to make sure their property remains safe.

Surety bond insurance for collection agencies – Collection agencies need to perform their service in accordance to the law and this is where Collection Agency Bonds kick in. Used to protect customers from fraud, these surety bonds exist in order to make sure that collection agencies perform their business ethically. Seeing as how these agencies handle money, getting this type of a bond is extremely important and advised. However, these are also inexpensive and easily obtainable.

Surety bond insurance for car dealers – MVD bonds, or Car Dealer Bonds are employed to protect citizens from potentially unethical practices of car dealerships and their employees, such as selling a stolen vehicle or providing inaccurate information about the car they are selling. Getting an Auto Dealer Bond is important because customers are more likely to choose a car dealership that has obtained it. They are also somewhat inexpensive and are considered a basic business expense, when it comes to car dealers.

When to Get a Surety Bond

When it comes to a Federal construction contract that is $150,000 in value or more, a surety bond is required when bidding or as a condition of contract award. If you meet these terms, you and your business are likely in need of a surety bond.

These were the basics of surety bonds – as a small business owner, you should make sure that you’ve understood everything, but also that you’ve done more research on the subject. Surety bonds are easily obtainable and cheap for the most part, and not owning one means risking severe financial losses.