Your top three questions about surety bond requirements: answered!

This is a guest post by Danielle Rodabaugh, who kindly sent in this guest post for entrepreneurs (young and old alike) who want to learn more about surety bonds.

As an entrepreneur who’s planning to start an enterprise, you obviously have a lot on your plate. Compiling a comprehensive business plan and budget is key to getting started. Most entrepreneurs expect to shell out money for office space, telecommunications, supplies, marketing costs and employee wages from the get-go. However, entrepreneurs can easily forget about the costs associated with various license, permit and registration fees. One of the most common hidden costs of starting a business is the purchase of a surety bond.

What is a surety bond?

Surety bonds tend to be the first budget buster that comes along with starting a new business because many entrepreneurs don’t know what surety bonds are or why they need them. They also don’t realize that laws typically require business owners to secure a bond before they can even apply for a business license, which means there’s no way to avoid paying for potentially expensive premiums.

So what is a surety bond, anyway? By definition, a surety bond is a three-party contract that binds together a principal who needs the bond, an obligee who requires the bond and a surety that backs the bond. The bond guarantees that the principal will act according to certain laws. If the principal fails to perform in this manner, the bond will cover resulting damages or losses.

How does bonding benefit entrepreneurs?

If you’re required to purchase a bond, its primary purpose is to protect consumers and government agencies from financial loss. However, you’ll still receive some key benefits from your surety bond purchase.

Higher industry standards. One of the major reasons government agencies require bonds is to ensure business owners follow industry regulations. If you work in an industry that requires bonds, you know that professionals are held accountable for their professional performance, which means you and your competition are prohibited from participating in unethical business tactics.
Customer confidence. You’ve likely heard other business owners advertise their enterprises as being legally licensed and bonded. They do so to assure potential clients that they’ve decided to work with a reputable company. Consumers feel more confident when working with bonded enterprises.
Limited competition. The strict nature of the bonding application process means not all applicants can qualify for the bonds they need. When applicants have poor financial credentials that disqualify them for a bond, they’re unable to get licensed, which limits the number of enterprises you have to compete against in order to make money.

How long do bonds last?

Depending on your state’s statutes, your bond must remain in effect for a certain period of time to ensure that your business license remains valid. In most cases, surety bonds are issued for one or two-year terms. To avoid a lapse in bonding coverage, you’ll have to renew the bond before it expires each and every time. You’ll have to pay a renewal fee each time your bond is renewed, so it’s important to account for this annual or biennial expense in your budget.

Underestimating the costs involved with starting a business can put your new enterprise in the hole before you even get started. By setting aside funds to pay for your bonding needs now and in the future, you’ll get your new business venture started out on the right foot.

Danielle Rodabaugh is the chief editor at SuretyBonds.com, a surety bond insurance provider that works with entrepreneurs every day to help them open for business as soon as possible.