Imagine that you have just bought a car, but despite your best efforts in examining it before purchasing, it breaks down within a week. In this situation, the surety bond that your auto dealer was required to post guards you from financial harm. Because of this protection, you can file a claim against the company and get compensated for your losses.
While some people have the misconception that surety bonds are insurance for a company, the reason why businesses purchase them is actually to protect their customers. Typically, there is an outside agency requiring the business to get one.
From the business’s point of view, needing to obtain a surety bond might seem like an unwelcome expense. However, surety bonds are actually an advantage for your business in that they help prevent unscrupulous companies from existing. There are also surety bonds that protect organizations in the event of employee theft.
If you are a small business or a startup, then you likely have a lot on your plate, as well as a limited budget. It can be tempting in this situation to take on responsibilities that would be better outsourced to a professional. Or while you know it would be prudent to purchase a surety bond, you are avoiding doing so in order to minimize your expenses.
Be aware that you can seriously harm your company if you are ignorant regarding the areas in which you need outside help. You might make the mistake of taking on more than you can handle or of being unaware of what your insurance does and does not cover.
While a surety bond is technically not business insurance, obtaining one does in the end help to protect your assets, in addition to protecting your clients. Depending on your industry, failing to invest in a surety bond could be disastrous for your company.
What Is a Surety Bond?
Surety bonds are financial and legal safeguards; they guarantee that businesses follow the law and their contracts. These types of bonds protect those who might suffer should companies go bankrupt or prove untrustworthy.
A surety bond is an agreement between three parties. The parties involved are you (the principal), the organization compelling you to get the bond (the obligee), and the company that is providing the bond for you (the surety). When you purchase a surety bond, you do not have to pay the bond amount. Rather, you agree to invest in a percentage of the total amount of the bond.
The bonding company is there to make sure you pay any claims filed against you. When you get your bond, the surety will require you to sign an indemnity agreement. This agreement means that while the bonding company will initially pay any legitimate claims, you are going to use your assets to pay back the costs to the surety, as well as any legal fees incurred. The surety, therefore, provides a form of credit to your company.
What Are the Risks If You Do Not Obtain a Surety Bond?
You might be wondering why you’d want to purchase a surety bond if you are in an industry where such bonds are not mandated. After all, surety bonds are not direct insurance for your company. If claims are filed against you justly, you will still have to pay them back whether or not you have secured a surety bond.
And even when surety bonds are required, sometimes agencies will accept your collateral directly, without a bonding company’s involvement. Why then would you invest in a surety bond if you can avoid that expense?
Posting liquid cash or an Irrevocable Letter of Credit instead of a surety bond would be unwise for several reasons. One is that you would have to directly offer your own assets as a pledge you will fulfill your promises. You will consequently decrease your working capital and increase the likelihood of bankruptcy.
Also, one of the functions of a surety company is to investigate any claims against you and reject those that are wrongly filed. Without a third party to vet these claims, you will have no outside protection should someone file one falsely.
If you are concerned with saving money, keep in mind that when you purchase a surety bond, you are not expected to pay the amount of the bond itself. You only invest in a percentage of it.
Why Types of Businesses Need Surety Bonds?
In addition to an auto dealer, another occupation that requires surety bonds is that of a notary public. Because notaries draw up and approve legal documents, surety bonds protect clients from legal risk by guaranteeing notaries are properly licensed.
Auctioneering, real estate, and travel are other examples of professions in which you typically need to get a surety bond.
What Is a Fidelity Bond?
Your company might not operate in an industry where you are required to get a surety bond. However, if your clients could be at risk from unscrupulous employees, you should consider getting a type of surety bond known as a fidelity bond.
If you own an accounting firm or run a cleaning company, a fidelity bond will protect your customers from employee theft and your business from the resulting fallout. And because of the protection these bonds provide, purchasing this kind of surety bond will give your business added credibility, attracting customers to you.
What If You Can’t Afford a Surety Bond?
If you lack the funding, but still need a surety bond for your business, you should consider the U.S. Small Business Association as a resource. The SBA can use its partnership with the government to assist you financially in applying for one of three types of surety bonds: bid, payment, and performance. You’ll need to apply for a bond with a surety company first and then see if you qualify for assistance from the SBA.
Don’t Give Yourself a Reason for Regret
If you are a startup or small business, there are serious reasons for you to consider getting a surety bond, even if doing so is not a requirement in your line of work. Don’t let the intensity of running a company cause you to overlook something that will safeguard your clients and your own assets.
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