What is a surety bond? Understanding the “bonded” in “licensed, bonded, insured”

“Licensed, bonded, insured.”  It’s a phrase I’ve heard throughout my life but have never fully understood.

Since so many business owners are sure to state that their companies are “licensed, bonded, insured,” I’ve always presumed this trifecta was the standard, if not the requirement, for certain kinds of businesses.  Heck, I’ve even asked sundry repair people and service providers if they are, indeed, “licensed, bonded, insured” without full knowledge of why that should matter.

I can reasonably fill in the blanks about the importance of “licensed” and”insured”; it’s the “bonded” that has eluded me.

I recently networked with someone who holds the answer.  Matt Bruns is a principal at SuretyBonds.com.  He’s in the business of bonds, and he’s volunteered a guest post to help me and you understand bonds better.  For certain kinds of small businesses, this is core information.

Here’s Matt’s post…

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Most people are pretty unfamiliar with surety bonds, despite their importance to both businesses and consumers. They are key risk mitigation and management tools for US small business owners, leading to significant benefits from the protection and credibility properly bonding provides.

Unfortunately, they often get over-looked or ignored, unless required by law.

Surety Bond Basics
More like a form of credit than insurance, surety bonds are required to secure state licensing for many industries. They are basically three-way agreements between a principal (the company or person doing the work), the obligee (the entity receiving the work or issuing the license) and the surety company. The bonds ensure that work or services are provided as specified by regulations, contract or law.

They’re also a way to recoup funds for consumers and other stakeholders in the event they’re harmed by the bonded business. For example, in the construction field, surety bonds help to ensure projects are completed, subcontractors are paid and contracts and regulations are followed. If not, surety companies can step in and make sure the projects are completed or developers are compensated.

But they’re just as important for small business owners and entrepreneurs. In some cases, businesses have to properly bond before they can obtain a state operating license.

Some of those industries include:
-Notaries public
-Mortgage brokers
-Health clubs
-Auto dealers
-Durable Medical Equipment providers (DMEPOS)
-Telemarketers
-Title agencies

Small business doesn’t have to be legally required to bond for it to be concerned with surety bonds. Fidelity bonds and Employee Theft Bonds protect business owners from harm if their employees break the law or harm consumers. Surety bonds can also be used as a competitive advantage — they help boost consumer confidence and display a business’ dedication to consumer protection and its ability to qualify for a bond.

Purchasing Surety Bonds
A surety bond can be acquired from an insurance company or an independent surety company, both of which require applicants to provide financial information and credit documents. Some bonds are quicker and easier to obtain than others and some require little underwriting while others take more detailed analysis.

The cost of a bond varies depending on a host of factors, including the type, the applicant and the state purchased for. Generally, premiums range from 1 to 3 percent of the bond’s value, but there are cases where an applicant’s credit or current financial status puts them in a high-risk category, leading to higher rates and premiums.

The state also may affect the cost.

Securing a surety bond may take only a matter of minutes and cost you a few hundred bucks. In turn, that bond can instill significant peace of mind and confidence among prospective and current customers.

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If you have any questions on Matt’s information, message him directly at matthew@suretybonds.com or visit his site at suretybonds.com.

Are you licensed, bonded and insured?  Share tips from your journey, and do some ‘bonding’ of another kind over on our Facebook group.

Thanks for reading!
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