Women business owners must navigate a lot of red tape if they want to manage a company successfully. Whether you’re a new or experienced business owner, you’ll have to make sure your business complies with all applicable laws. Keeping all forms, fees and other licensing prerequisites up-to-date can be stressful.
No matter the industry, surety bonds are one requirement that business owners often know little about. Surety bond requirements are often an elusive aspect of the business licensing process.
Understanding surety bonds can help alleviate some of the stress. To make the licensing process faster and easier in the future, this article answers five questions women business owners typically have about surety bonds.
1) What are surety bonds?
It seems like such a basic question, but so many business owners know very little about surety bonds — other than the fact that they’re required to purchase them before getting a business license.
Every surety bond that’s issued brings three entities together in a legally binding contract.
- As the purchaser, you’re the bond’s principal. You buy the bond as a financial guarantee of your ability to work according to certain laws.
- As the party requiring the bond, a government agency is the bond’s obligee. Whoever requires the bond does so as a way to regulate an industry, protect consumers and avoid potential financial loss.
- As the entity backing the bond, the underwriter is the bond’s surety. The surety provides a financial guarantee of your ability to meet the bond’s terms.
By purchasing a bond, you bind yourself to a legal contract that says you’ll do your job according to whatever laws the bond references. If you fail to do so, the obligee can make a claim on the bond as a way to charge a fine, or harmed clients can make a claim to gain reparation. If a claim is paid through the bond, your surety will expect you to repay their costs.
2) How do I know if I need a surety bond?
Government agencies enforce surety bond regulations in many different industries. One of the most commonly required surety bond types is a license and permit bond, which business owners must file with the state before they can receive their licenses operate legally. If you need a bond, chances are it’s a license and permit bond.
The easiest way to determine whether you need a surety bond is to contact the government agency that will be issuing your business license. A number of state agencies list their license and bonding requirements online. If you’re having trouble finding the requirements, a quick call to the office should help you find out which bond you need.
3) How do surety bonds help my business?
Surety bonds give your business an upstanding professional reputation. Surety providers only issue bonds to business owners they’ve found to be qualified and financially responsible. As such, you can use your company’s bonded status as marketing tool that reassures your clients. Because bonds provide a legally enforceable financial guarantee that you’ll operate your business according to certain regulations, you customers will feel more confident doing business with you, no matter what industry you work in.
4) How much does a surety bond cost?
Surety bond costs vary for a number of reasons. Some of the most influential factors include
- the specific surety bond type
- the bond amount
- your application/financial credentials
- the surety provider you work with
- whether you choose to finance your bond
Generally speaking, applicants who qualify for the standard market pay a premium that’s calculated as 1 to 5% of the bond amount. So if you need a $25,000 bond, you’d pay $250 to $1,250 for your bond. Applicants who fall into the nonstandard market could pay up to 20% of the bond amount, which would mean a $5,000 premium for the same bond.
5) What happens if I don’t get a surety bond?
Failing to maintain proper bonding when required by law to do so can result in adverse consequences such as
- penalty fines
- license revocation
- legal action against your business
- an inability to get bonded in the future
Simply put, business owners should ensure they’re in compliance with any applicable surety bond regulations at all times. Renewing your bond on time is equally important. Surety bonds are typically issued for one-year terms, which means you’ll need to apply for a new bond before your current one expires. Fortunately, this does allow you to look for better rates when your financial situation improves.
About Author: Danielle Rodabaugh is the editor of the Surety Bonds Insider, an online publication that explores trends in the surety industry and explains them to consumers. The publication is sponsored by SuretyBonds.com, a nationwide surety bond producer that helps women business owners start their companies on a daily basis.