Surety Bonds for the Entrepreneur

Posted July 5, 2010 by Matt Bruns

Surety bonds can make a world of difference for fledgling entrepreneurs.

They are key risk-mitigation tools that can insulate business owners from financial harm and reassure consumers that you’re committed to consumer protection. They’re also mandatory for scores of industries and business types, from construction and health care to travel agencies and janitorial services.

But they’re also often misunderstood, if they’re even considered at all.

How Surety Bonds Work

Surety bonds are basically three-party agreements among a principal (the company performing the duty), the obligee (the entity receiving or licensing the work) and the surety company that issues the bond. In the construction industry, contract bonds help ensure that projects get completed, subcontractors get paid and bids are legitimate.

For example, contractors in Chicago and across the country are required to post Performance Bonds on public construction projects. These bonds essentially guarantee that the work will be finished and the contract will be followed. If the contractor defaults or somehow fails to follow the contract, the surety company makes sure the work gets completed or the project owner is financially compensated.

A surety bond in Illinois also protects consumers and taxpayers at large. Many businesses that need state licensing to operate often require a surety bond as well. Posting a bond with the state ensures that consumers who might be harmed by a business have a way to be made whole — they can file a claim against the bond. There are thousands of commercial surety bonds, including ones for:

  • Mortgage brokers
  • Travel agents
  • Health clubs
  • Auctioneers
  • Durable Medical Equipment providers (DMEPOS)
  • Notaries public

Why They Matter

Surety bonds are obviously crucial for companies required to obtain them. Without a bond, thousands of start-ups can’t get off the ground and secure the necessary licensing to legally operate. But surety bonds are also important for entrepreneurs who aren’t required to purchase them.

First, surety bonds convey a sense of security, legitimacy and consumer protection. Being bonded means that consumers have a clear path to recourse if they’re harmed. It also means the business owners has the financial profile and credit necessary to secure a surety bond. That can be an important marketing tool for entrepreneurs looking to separate themselves from their competition.

Surety bonds can also protect business owners themselves. Fidelity bonds and other bond types can insulate entrepreneurs from harm if their employees engage in illegal or illicit activities, like theft.

How to Purchase Surety Bonds

Surety bonds require a look at a entrepreneur’s financial health, credit profile and at times more. As with insurance, sureties rely on underwriters to make a determination about an applicant’s suitability for a bond.

Bond costs will vary based on the bond amount, the type required and the applicant’s financial standing. Typically premiums range anywhere from 1 to 3 percent of the bond’s face value. Entrepreneur with less-than-perfect credit may wind up in a high-risk category and pay substantially higher bond premiums.

Sometimes start-ups wind up seeing higher bond costs because they don’t have a lengthy track record of sound finances. But rates can also vary by the surety provider, so entrepreneurs should shop around for the best deal possible.

** A featured post by Matt Bruns of suretybond.com


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