Becoming bonded is a very important first step for most business owners, because it’s a feature of your business that makes you appealing to potential customers, and gives them a good reason to choose you over a competitor. The fact that your business is bonded gives clients a certain amount of confidence that you will live up to the terms of the bond, and therefore represents an assurance of reliability.
Another driver which forces you to think about how to become bonded is the fact that the licensing of your business may require that you become bonded, and licensing is itself necessary because it allows you to legally operate your business within a given state or local area. Without that license to operate, your business would be subject to potentially damaging fines levied by the agency having jurisdiction. Brighthub makes some good points about how to get bonded for a job.
When considering how to become bonded, you’ll have to determine whether you need a surety bond or a fidelity bond, since the two have different purposes. A fidelity bond protects your business against employee theft or improper behavior, whereas a surety bond is generally required when working on government jobs, and serves to protect the public interest as well as the hiring government agency.
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Becoming bonded and insured
While it is definitely an important step, and sometimes even a required action, to become bonded and insured, it’s not usually a good idea to undertake the two actions at the same time, or with the same supplier. Since not all businesses even qualify for bonding, you will first have to find out if yours is one which does qualify for bonding. Usually a thorough background check will be run against you and your business by a bonding company, looking for any criminal record, and checking personal references as well as those supplied by business peers.
Getting insurance for your business is a little more straightforward and does not require the kind of checking associated with bonding. However, if you were to go to an insurance company to seek both insurance and bonding, the bonding part of that action would probably be farmed out to one of several bonding companies the insurer might work with. In effect, that would bring a third party into the process, which might well cause delays and extra costs when you’re applying, and might also cause processing delays and higher charges when any claims need to be made. Chron has an excellent article about how to get properly bonded. Have a read, then give us a call!
What is a surety bond?
A surety bond is in essence, a promise by a guarantor company (the surety) to pay another individual or company (the obligee), an amount of money stipulated in the terms of the bond, in the event that the third party (the principal) fails to live up to the obligations specified in the contract. The purpose of a surety bond is to protect the obligee against possible losses incurred as a result of the principal’s failure to meet the pre-specified conditions.
Surety bonds are often required on government contracts, as a protection for the government against inadequate performance by contractors who do not fulfill terms of the contract. In such cases, the surety company would be obliged to pay a certain amount (the face value of the bond), so as to rectify matters with the government agency. In turn, the surety company would then seek reimbursement from the principal as a penalty for defaulting on the agreement obligations. This is not only financially damaging to the contractor (principal), but can inflict serious ongoing damage to his business reputation.
How to get a surety bond
Applying for a surety bond is not a difficult process, as long as you’re somewhat prepared beforehand. Here’s what will be required:
- Personal data – as the principal referred to in the above three-party contractual agreement, you will need to supply a surety company with full name, address, social security number, birthday, business name, and business address. If married, you’ll also have to include your spouse’s information, as well as information on any other owner in your business who holds at least a 5% share in it.
- Obligee data – this is the name and address of the obligee, or the government agency which is requiring you to obtain the surety bond. The type of business involved must also be identified, and the face value of the bond must be set, generally at the behest of the obligee.
- Financial data – a personal financial statement must be submitted by all co-owners in your business who hold at least a 5% share, and this should be prepared by a certified public accountant (CPA). In situations where the principal company has not had one full year of operation, these required financial forms may be waived, in favor of a formal management statement.
- Credit rating – your company credit rating goes a long way toward determining the rate you’ll have to pay to become bonded, so you need to know where you stand before applying. If you have weak or bad credit history, you can still be approved for bonding, but you should expect to pay a much higher premium than you would with a strong credit rating.
- Bond issuance – the bond itself is a legal document which will be issued after your application has been approved, and it contains the amount of the bond as well as the conditions which you’ll be required to live up to.