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A Basic Guide to Bonding for Entrepreneurs and Small Business Owners

December 20, 2012

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I would like to introduce this week’s issue of the Guest Post Series on SCORE Lancaster’s blog contributed by Sara Aisenberg. Sit back and enjoy!

Many entrepreneurs need surety bonds before they can open a new business, and many must then renew them periodically to remain in compliance with industry regulations. As such, the term “surety bond” should be a part of every entrepreneur’s vocabulary. Unfortunately, most people don’t know much about surety bonds until they try to establish a start-up. To educate small business owners about this unique risk mitigation tool, the following guide will explore the who, what, when, where, why and how of surety bonds.

Who needs a surety bond?

Across the country, business professionals in certain industries must obtain surety bonds before they can be licensed to legally work in their respective cities and states. According to various laws enforced by government agencies in Pennsylvania, contractors, mortgage brokers, auto dealers and lottery retailers are just a few types of professions that must be bonded. To find out if you work in one of the many industries that require a surety bond, contact the local government agency that handles licensing and registration for your industry.

What is a surety bond?

A surety bond is a legally binding agreement that reinforces industry regulations and protects businesses, consumers and/or government entities from financial loss. Depending on the type of bond and how it functions, a surety bond can do the following:

  • protect consumers from fraudulent or unethical business practices performed by a company
  • protect companies from fraudulent or unethical business practices performed by an individual
  • protect government agencies from businesses and working professionals that break the law

Individuals in need of a surety bond should know that a bond legally and financially binds three parties together. The principal party purchases the bond, the obligee party requires the bond, and the surety company produces the bond. When the principal party purchases a bond, it pledges to the obligee that the job in question will be done ethically and according to the bond’s terms. The surety backs up this pledge by producing the bond.

When do I get a surety bond?

It’s always smart to seek out a reputable surety company to work with well in advance of when you need your bond. Although it’s best to apply for your surety bond prior to business licensing and registration deadlines, some surety bond providers can help customers get bonded in just 24 to 48 hours.

Contact several underwriters to find the best rate possible for your bond. When applying for most types of surety bonds, you’ll need to provide the following information:

  • the state where your business will be located
  • the amount in which you need the bond
  • who is requiring the bond
  • your personal and professional financial histories
  • your credit score

Where do I submit my surety bond?

Once the bond is in your hands, you’ll need to submit it to the agency requiring it (the obligee). If you’re a contractor who needs a bond for curb and sidewalk work, for example, you’ll send your paperwork to the City of Lancaster at 120 N. Duke St., P.O. Box 1599. If the state of Pennsylvania requires you to post a surety bond, you’ll submit your bond form to the appropriate state agency.

Why do I need a surety bond?

In the same way that surety bonds protect consumers, companies and government agencies, they also help individuals build credible and ethical business reputations. If you’re a contractor, for example, being bonded tells future employers that you have a history of finishing construction jobs successfully, on time and on budget. If you’re a mortgage broker, being bonded tells your clients that you have a history of conducting business ethically and lawfully, which includes handling funds appropriately and advising clients to make smart decisions with their money. Whether you’re an MMA promoter, a grain warehouseman or a travel agent, surety bonds help consumers and your state and/or city trust you with their business.

How much will my surety bond cost?

The cost of your surety bond depends on several factors, including:

  • the type of bond
  • the amount of the bond
  • the associated risk of the bond
  • the duration of the bond term
  • your personal and professional financial credentials
  • the surety company you choose to work with

Because so many factors impact bond rates, surety bond costs can be difficult to predict. Many surety bond companies work with a number of underwriting markets, some of which specialize in nonstandard or bad credit bonds. For this reason, individuals with poor credit can often still get bonded if they work with certain surety bond producers. Depending on the bond company you choose to work with, some bond types can even be written freely without a credit check.

To ensure that you have the resources you need to get bonded as quickly and easily as possible and, therefore, start your business venture off on the right foot, account for your surety bond cost in your start-up budget. It’s always better to over budget for bonding, licensing and registration fees than to be blindsided by unexpected costs during the start-up process.

Although most business professionals aren’t initially aware of the bonding requirements for their industries, entrepreneurs should fully understand them before embarking on a new business venture.

Sara Aisenberg is a member of the educational outreach team at SuretyBonds.com, which is a nationwide surety bond producer. Through her writing, Sara helps entrepreneurs and small business owners better understand bonding requirements, which helps them get their businesses up and running as smoothly as possible. Keep up with Sara on Google+.

 

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