What Does It Mean to Get Bonded?

construction business
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What does it mean to be licensed, insured and bonded? As a small business owner, you are most likely familiar with those terms from dealing with contractors or third-party service providers you may have evaluated or hired in the course of running your business. If you are a contractor or service-based business owner yourself and you are just getting started, you may be trying to figure out if you need to be any or all of these things in your business. Let's tackle these terms one by one.

Licensing - Depending what type of business you have, a license to operate may be required in your state. A license signifies that you have the necessary training and meet the requirements needed to complete the job you are attempting to get hired to perform. Some examples of businesses that may need to be licensed include medical professionals, attorneys, salons, accountants, home improvement contractors, real estate agents and any businesses that handles food or alcohol (i.e., bars, restaurants and food trucks).

 

Insurance - When a company is insured, it means that the business has protection in case there is an accident or if an employee is injured in the course of performing his or her job. There are several types of business insurance that protect the business from a variety of risks, but keep in mind that not every business needs all types of insurance. All small business owners just getting started should discuss their insurance needs with a qualified insurance advisor before opening their doors to customers.

 

Bonding - This last term is perhaps the least understood of the three, but it is equally important to being licensed and insured. Let's take a deeper look at what it means to be bonded.

What Is Bonding?

While business insurance is protection for the company, being bonded means that a company has purchased protection for the customer. If something goes wrong, the customer can file a claim against the company and the bond purchased by the company will cover the cost of the claim, provided it is a valid claim. In its simplest terms, bonds are meant to protect consumers from harmful, unethical or otherwise poor business practices.

What Are the Common Types of Bonds?

There are two primary types of bonds -- fidelity bonds and surety bonds. 

Fidelity Bonds

A fidelity bond can be considered a supplement to business insurance because it provides protection for both the customer and the business from theft, misconduct or fraud on the part of the company's employees.

If a company is performing services in a customer's home providing a service, for example, and an employee steals something, a fidelity bond can be used to cover the cost of the employee's misconduct and the company is not directly liable for the damages caused by the employee. So while a fidelity bond is primarily protection for the customer, it also protects the business from errant behavior on the part of its employees.

Surety Bonds

A surety bond, which can also be called a performance bond, provides the customer with a guaranteed assurance that the services will be provided as agreed. There are three parties involved in the purchase of surety bonds:

  1. The Principal – The principal is the company that will be providing the services and the purchaser of the bond.
  2. The Obligee – The obligee is the party that requires the bond in order for the principal to do business, usually a state or municipality.
  3. The Surety – The surety is the insurance company that issues the bond.

Here is an example of how bonding works in the case of a surety bond. 

Let's say a construction company purchases a bond because it is required in the state the business is operating in, or as a guarantee of the quality of work they will perform for customers. The company is hired to build a deck for a customer, but during the course of the project, the construction company damages part of the siding on the customer's home. The customer asks the company to repair the siding, but the company can't (or won't) fix the damage. The customer can then file a claim with the surety company, and if the claim is found to be valid after an investigation, the customer will be repaid from the bond the company originally purchased.

The customer can then use the money paid through the bond to hire another company to fix the damage.

What Types of Businesses Need to be Bonded?

You will need to be bonded if your state or municipality requires it. In addition, if your business frequently performs services in customer's homes on the premises of other businesses, you should strongly consider getting bonded to protect your customers and your business's financial health. 

Although being bonded is primarily protection for the customer, it can also provide your business with financial stability in the case of a dissatisfied customer. In the unfortunate event of a customer making a claim against your business, the compensation needed to settle the claim would come from the bond and won't impact your immediate operations. 

Bonding may not be required in some situations, but it can provide significant benefits if you are. Being bonded provides a layer of trust between your business and your customers because you are giving them assurances to the quality of your work while providing a way for them to be made financially whole if something goes wrong. When your business is bonded, it can send a message to prospective customers that you are professional, credible and ethical. This can be used to answer the question: "Why hire us?" in your marketing messaging.

 

How Can You Start the Process of Getting Bonded?

The first step to getting bonded is determining if you do, in fact, need to be bonded and what type of bond you may need. This will depend on where you are located and what type of business you have. The best way to make this determination is to consult an attorney, a surety or insurance company or another qualified bond specialist who can advise you on your individual situation. 

If you are at the very beginning stages of starting your small business, this startup guide is a great place to start.