Surety Bonds Vital Concern For New Businesses

Posted by on September 30, 2010 in Business Management, Business Start Up Advice [ 3 Comments ]

With ever-increasing regulations across most industries, starting up an enterprise these days can be intimidating for those striking out on their own for the first time. Entrepreneurs and new business owners have a lot of legal hoops to jump through before they can open for business, and it’s common for them to misunderstand the purpose of some of the regulations.

One common misconception is the need for surety bonds, as many individuals understand them to be identical to insurance policies. They are actually more like a form of preventative credit as opposed to retroactive compensation. Unfortunately, a great number of entrepreneurs and new business owners are unaware of how exactly bonds work as they set out to establish a new enterprise.

Surety bonds act as key risk mitigation tools that protect both government and consumer interests. Federal, state, and local government agencies frequently require professionals working in many industries to get bonded before being issued a business license.

Surety providers issue various types of bonds to individuals and companies to guarantee the quality of the work they will do. In the bond’s legal language, the entity who gets bonded is the principal while the entity requiring the bond is the obligee. If the principal fails to fulfill the bond’s contractual terms in some way, the obligee can make a claim on the bond to recover compensation. If the individual or business is not able to compensate the harmed party, than the surety will be held accountable for resolving the situation.

Since sureties hope to avoid having any claims made on a bond, they complete thorough background checks of the principal’s financial history, credit score, and work record. Should the surety choose to issue a bond after reviewing the principal’s past performance, consumers can be assured of the enterprise’s probable reliability in the future.

Countless professionals get bonded every year to guarantee the quality of their work. Those who work in the construction industry utilize surety bonds multiple times each year. With every new project, contractors typically need to secure a bid bond, a performance bond, and a payment bond. The healthcare industry mandates the use of bonds for certain professionals by using:

  • healthcare professional bonds
  • patient trust bonds
  • DMEPOS (or Medicaid) bonds

Surety bonds are also big in the finance industry, as mortgage brokers, bankers, and collection agencies all secure bonds to protect their clients.

Getting yourself or your new business bonded might be necessary in order to operate legally. Even if it’s not, you can still choose to build a stronger business by taking advantage of the benefits surety bonds provide. Consumers and clients feel more confident when working with bonded entities, as they know a surety’s financial backing of the establishment defines it as a reliable enterprise that is dedicated to customer satisfaction.

This is a guest post by Kevin Kaiser of as part of the Surety Bond Education Program he helped pioneer two years ago when he joined the company. When not writing about surety, you can find him training for a marathon.

3 thoughts on “Surety Bonds Vital Concern For New Businesses

  1. avatarSurety Bond Cost

    This article brings up an excellent point, that new businesses should consider surety bond cost when determining start-up costs. For some businesses, such as auto dealers and mortgage brokers, surety bond cost can be substantial, depending on their credit score and their respective state.

    However, it’s important to understand that you (the principal, aka business owner) do NOT need a surety bond unless there is an entity (an obligee) out there requiring you to get bonded. An overwhelming majority of the time that obligee is some sort of government entity (local, state or federal). Small business owners frequently get confused into thinking that buy “getting bonded” with a surety bond, their customers will have peace of mind and be more willing to work with them vice another company. Surety bonds aren’t insurance though.

    Bottom line: If no external entity is requiring you to get a surety bond, you most likely don’t need one!

  2. avatarsurety bonds

    Surety bond rates are based off of a multitude of factors. Your credit score does play a big factor in obtaining a rate, but experience, how long you have been in business for and your assets all come into play.

  3. avatarperformance bonds

    surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation. Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.

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