The reality of owning a small business in the United States today is that most companies will eventually, in the course of doing business, encounter a surety bond. If you’re one of the many companies today that does need a bond to conduct your business legally, you have probably wondered what the financial benefits are to the bonding process. And it would follow that you’ve also considered the legal and financial ramifications of not purchasing the necessary surety bonds for your company.
What is a Surety Bond?
Surety bonds represent an agreement between three parties: the party requiring the bond, the party purchasing and maintaining the bond, and the surety bond company who sells the bond. Typically, the entity who requires the bond is usually a governmental agency, and in addition to the federal government’s bond requirements, most states and localities have their own regulations which legislate bond coverages. Ultimately, the government’s insistence on bonding is generally to protect consumers against misconduct or non-performance on the part of the bonded company. If a consumer is harmed in the course of doing business with a bonded company, the party requiring the bond files a claim against it and, if the claim is valid, the surety bond company pays an agreed upon damage amount (up to the full value of the bond). Because the surety company pursues reimbursement from the bonded company, however, surety bonds are not a form of insurance but actually a form of credit.
Becoming bonded is a simple process and is generally inexpensive, particularly compared to insurance premiums and other small business expenses which can add up quickly. Bond amounts vary widely based on the type of bond that you need. For instance, when it comes to surety bonds in Illinois, a mortgage broker bond needs at least $20,000 while a collection agency needs a $25,000 bond to conduct business. Prices on these bonds can vary based on the dollar amount required and on the company’s credit status and financial history, which will be reviewed by the surety company at the time of purchase. If the company seeking the bond has a very poor credit history, they may not be able to purchase a bond at all, or may have to seek out a surety company that specializes in subpar credit bonds. Since surety bonds are a type of credit and rates are based on the financial health of the applicant, these bonds are at least twice as expensive as surety bonds for companies who have excellent credit.
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Incentives of Surety Bond
While at first the prospect of a surety bond can seem potentially cumbersome and like one more hoop you need to jump through in order to conduct your business, rest assured that there are incentives to maintaining a valid bond. Most notably, incorporating your bonding status in your company’s advertisements will most likely increase your sales and business a great deal. In today’s difficult economy, consumers are becoming more and more aware of the importance of doing business with reputable, safe companies in order to maximize their gains from the transaction and minimize their loss, and becoming licensed and bonded represents a company’s willingness to work within the appropriate legal channels for their industry. Be sure to advertise your licensed and bonded status prominently in any promotional activity for your business, and mention it in any conversation you have with new clients and customers.
On the other hand, if you choose not to comply with legal requirements and purchase a bond, there are consequences, and some can be quite dire. Not maintaining the appropriate surety bonds can result in financial consequences first, namely fines from state, local, or federal government. Additionally, the lack of a surety bond can result in your business license being revoked or suspended which will effectively shut down your company until you’ve become bonded and can resume activity. Becoming bonded and resuming business can take up to several weeks due to the legwork required with getting paperwork where it needs to be, and providing documentation to all the parties who need it.
Are There Hidden Costs?
As we mentioned earlier, there’s also a rather hidden cost of failing to purchase a surety bond. Consumers use your bonding status as a sign of your company’s willingness to perform your job ethically and according to fair business practices. Choosing not to uphold your legal obligations to take out a surety bond demonstrates a poor attitude towards business in general and can be extremely detrimental to your public image.
Purchasing the required surety bonds for your business should really be a no-brainer. Bonds typically only cost a few hundred dollars, but the penalties for not carrying the required bonds can be well into the thousands. Don’t expose your business to risk and poor publicity. Save yourself some time, money, and sanity by getting bonded before you even begin doing business.
Bio: This is a guest post from Matt Bruns, a principal for SuretyBonds.com, the nationwide provider in surety bonds, as part of their surety bond education program. Matt is not affiliate or endorsed by LPL Financial.