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What are Surety Bonds and Why Do Small Businesses Need Them?

A surety bond – also known as a commercial bond, license bond, or a permit bond – is a contract that protects clients and compels businesses to complete a project according to the agreed terms. Here’s what it means in simple English: a business that provides professional services signs a contract with a surety (a company that provides businesses with commercial bonds). This contract makes it possible for clients of the business to get compensated if the business doesn’t complete a project as agreed, or if the client suffers any losses due to the business’s actions while working on the project. 

This compensation is paid to the client by the surety, and afterward, the surety gets the money back from the business. Unlike an insurance policy, a commercial bond is designed specifically to protect the clients, and not the business that actually bought it. So, the logical question any business owner who’s not familiar with surety bonds will ask is: why should I pay for something that doesn’t even protect my business? You’ll find answers to this question below. 

Some businesses need bonds to get licenses 

The first, and perhaps most prominent, reason for any business to get a surety bond is that the law requires it. In most states in the US, businesses that offer services like real estate, plumbing, electrical work, notary public as well as general contractors and auto dealerships would not be able to get a license to operate without a commercial bond. 

Basically, the bond ensures that the business will provide its services in compliance with the state’s regulation. Any deviation from this, and their clients can file a claim with the surety and get compensation. So, if a plumbing business abandons a project halfway, the client can get money from a surety to complete the project with another contractor. And if workers from a cleaning business damages something in the process of cleaning an office or apartment building, the client can get compensation for the damages from the surety. 

Clients may request for a bond before approving a contract 

Unsurprisingly, because it provides them with financial protection, some clients will request that a business they want to work with is bonded in addition to being insured. This is especially true for big contracts and projects that involve government organizations. So, to get the really big jobs that keep the lights on at your company, you’ll need a surety bond. For clients, the bond offers assurance that the project will be completed as agreed, and without any losses to them. And for you the business, the bond keeps you on your toes, and compels you to provide top-quality services – just like you promised when signing the contract with your client. 

Bonds give you a competitive edge over rival businesses 

Of course, if you have a commercial bond and competitors around your business location do not, you have an advantage over them. Since you’ve already paid for the bond, you can use it to convince clients (even ones that won’t think to ask for a bond) that it is safer to work with your business than one that doesn’t fully protect their interests. The bond shows them you take full responsibility for the services you provide, and tells them they’re covered in case of any incidents. 

Final note

Here’s how best to understand the need for a surety bond: by starting a business, you made an (un)spoken vow to always provide your clients with the best services. And every day your company remains open, you must do everything within your power to uphold that vow. As long as you do that, you should never need to reimburse a surety because a customer filed a claim. If you’re worried that customers may file claims that are false, there are measures in place to ensure that doesn’t happen – or that you get justice when it does.

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