If you’re embarking on the journey of opening a new small business, you may feel overwhelmed by your ever-growing to-do list. Today, we want to clear up any confusion surrounding small business bonds so you can check that item off your list.
Small business surety bonds are essential tools that protect your business and customers and ensure compliance with laws and contracts. This article will explain what small business bonds are, why they’re crucial, and what types you’ll need to start a new business or continue operating your current business successfully.
What are small business bonds?
Small business bonds are legally binding contracts that involve three parties:
- Obligee (usually a government agency or project owner requiring the bond)
- Principal (the small business owner or entity purchasing the bond)
- Surety (the company issuing the bond)
Surety bonds serve as a guarantee that your business will fulfill its obligations regarding contracts, licenses, and other legal requirements. If your business fails to meet these obligations, the obligee can file a claim against the bond to recover financial losses. The surety company will pay the claim upfront, but you, as the principal, are ultimately responsible for reimbursing the surety.
What does “bonded” mean for a small business?
When a small business is “bonded,” it has purchased a surety bond to provide financial assurance to its clients, partners, or regulatory agencies. Being bonded instills confidence in your business, signaling to potential clients and stakeholders that you’re trustworthy and committed to fulfilling your obligations.
For example, if you own a real estate brokerage, your clients can trust that you’ll adhere to the terms outlined in their agreements if you’re bonded. If you break your contract, they can file a claim against the bond to recover financial losses. This added security can serve as a compelling selling point for your business.
What are the main types of bonds for small businesses?
Depending on the industry and specific regulations, small businesses may require various types of bonds. Here are the main types of bonds you’ll come across:
Commercial Bonds
Commercial bonds cover a broad range of surety bonds required by businesses across various industries. Some of the most common types include:
- License and permit bonds: For businesses that need a license or permit to operate legally in a state or municipality. Common examples include auto dealers, insurance brokers, and alcohol distributors.
- Contractor license bonds: Required of contractors to ensure they adhere to local licensing laws and regulations.
- Public official bonds: For individuals elected or appointed to public office to ensure they perform their duties ethically and legally.
- Fidelity bonds: Protect businesses against losses caused by employee dishonesty like theft or fraud.
- Court bonds: For individuals or businesses involved in legal proceedings. Common examples include appeal bonds and probate bonds.
Contract Bonds
Contract bonds are crucial for businesses in the construction and contracting industries. These bonds ensure that contractors complete projects according to the terms of their contracts. There are several types of contract bonds:
- Bid bonds assure project owners that the contractor will honor their bid and execute the contract if selected.
- Payment bonds ensure the contractor will pay subcontractors, laborers, and suppliers involved in the project.
- Performance bonds guarantee that the contractor will complete the project per the contract’s specifications.
- Ancillary bonds cover specific aspects of a contract not directly related to performance (e.g., warranties or maintenance agreements).
How much do small business surety bonds cost?
The cost of a small business surety bond varies depending on several factors, including the following:
- Type of bond
- Bond amount required
- Financial stability of the business
- Creditworthiness
Your premium will be a percentage of the total bond amount, typically ranging from 0.5% to 10%. For example, if you need a $30,000 license bond for your janitorial business, and the surety company charges a 1% premium, the cost would be $300 per year. Businesses with poor credit or a high-risk profile may pay higher premiums.
What if my new business can’t get bonded?
New businesses or those with less-than-perfect credit may need help to obtain a surety bond. However, hope is not lost. At ZipBonds, we specialize in helping small businesses secure the bonds they need, even if they face obstacles like limited credit history or financial challenges. Our solutions include:
- Putting up collateral
- Using a co-signor
- Funds control
- SBA bonding (more on this below)
- Breaking up a large contract into smaller pieces
- A mixture of any of these
Don’t let the fear of not getting the bonds you need hold you back. Reach out any time, and we’ll help you find a solution.
SBA Surety Bonds for Small & Up-and-Coming Businesses
The Small Business Administration (SBA) offers a Surety Bond Guarantee Program designed to help small businesses, particularly those new or with difficulty securing bonds through traditional means. The SBA guarantees a portion of the bond, reducing the risk for surety companies and making it easier for small businesses to qualify.
If you’re struggling to obtain a surety bond, the SBA’s program could be a great resource. ZipBonds is a preferred provider of SBA-backed surety bonds. We’d be happy to help you determine if this program is right for your business. Call us at (888) 435-4191 with any questions. You can also learn more about the program on our blog.
People Also Ask…
Here are some practical reasons many small businesses should get bonded:
- Builds trust with your clients: Surety bonds show your clients that you’re serious about your work and that they’re covered if something goes wrong.
- Helps you win contracts: Many clients or companies only hire bonded businesses. It’s often a requirement for getting bigger jobs, so being bonded can present more opportunities for you.
- Protects against financial loss: If something doesn’t go as planned—like not finishing a project or making a mistake—the bond can help cover the costs for the party that loses money.
- Strengthens your reputation: Surety bonds can make your business look more professional and reliable. They tell people you’re committed to doing things right, which can attract more customers.
- Compliance with legal requirements: In many industries, being bonded is a legal requirement for state or city/county licensing.
- Supports business growth: As your business grows, surety bonds can help you tackle larger projects and continue to expand.
Yes. Having a surety bond doesn’t replace the need for business insurance. They offer different types of protection. A surety bond protects your clients and stakeholders by ensuring compliance with regulations or contracts. Business insurance protects your business from risks like property damage, liability claims, or employee injuries. Both are essential components of a comprehensive risk management strategy.
No. Business insurance and surety bonds serve different purposes. Business insurance covers risks associated with your business operations, protecting your assets and financial interests. Surety bonds guarantee your performance and compliance with legal obligations, protecting your clients and the public.
ZipBonds for Your Small Business Bonding Needs
Whether you need a contract bond, commercial bond, or help securing a bond through the SBA program, ZipBonds would love to assist you in any way we can. Our team lives and breathes surety—it’s all we do! And we’re dedicated to providing our clients with fast, easy, and tailored bond solutions.
We’d love to chat with you over the phone or by email. Reach out any time!
- support@zipbonds.com
- (888) 435-4191