Starting a Small Business? Here’s All You Need to Know About Surety Bonds
When it comes to work, it’s every person’s dream to have an opportunity to run their own business. However, this is not a simple task. A start-up involves a lot of planning before you can start enjoying profits from your business. Getting your business off the ground is not an easy feat since it may require a lot of money. However, a surety bond can help you kick-start your business. If you want to start a small business, read on to learn all you need to know about surety bonds.
When Do You Need It?
You may be required to get a surety to be able to operate your startup, depending on the industry you’re planning to venture into. If you are in the construction industry, you will need a surety bond that you can use for bidding on public projects. Other types of businesses that may require surety bonds include the following:
- Travel agencies
- Auto dealerships
- Health clubs
- Collection agents
- Mortgage brokers
- Notary publics
Before you get a surety bond, you must do some research so that you get the ideal one that suits your needs.
What Is It?
This is an agreement that involves three people where a promise to pay the obligee is made. The three parties involved in a surety bond include the following:
- The principal is a small business owner who buys a bond to perform work
- The obligee is someone who needs assurance that the job will be completed
- A surety is the insurance company that steps in when the principal fails to complete their work.
The surety works with the principal to ensure that the obligee is paid in case of failure by the principal to meet their obligation. A surety bond is primarily concerned with safeguarding the obligee so that they do not experience losses when the principal fails to comply with their commitment. They also help to protect the customers if the business operator fails to follow the obligations on their license. The consumer files against your bond if you fail to meet your obligations. There are different types available that are suitable for small startup businesses.
While these bonds will cost you money, they come with lots of benefits. Some of the advantages include the following:
- Everyone involved in the project gets protection
- Boosts consumer confidence in your business
- Opens new opportunities to access more projects
When you are bonded it becomes easier to do business with your venture since there will be surety aimed at ensuring that all work is completed. Contractors may fail to meet their obligations as a result of many factors and this is when these kinds of bonds come in handy.
All the parties involved will sign an indemnity agreement that helps to protect the interests of everyone. This contract involves the surety company and the principal where repayment should be made to the surety company if it pays money in case of a claim. This simply means that the bond offer does not lose any money. Instead, the business owner or the principal will be responsible for paying back the surety company.
Applying for One
You need to first figure out if you need this kind of bond for your business. If so, you should choose the right type that suits your unique needs. In most cases, startups are usually tight on budgets but you need to pay for your bond upfront. You can use your credit card to finance your bond if you do not have the money. You will not get the bond if you do not finance it. Therefore, you should prepare in advance and save some money if you know that you will need a bond.
The application process is simple, and bond sureties rely on underwriters. Many types of bonds can be processed on the same day. The total cost depends on the type of bond that you choose the strength of your startup application. You will pay a bond in the form of a premium that is normally 5 percent of the value. The other thing that you should know is that if you have bad credit or financial history, you may be forced to pay a higher premium.
If you want to start a business, you may need a surety bond that mainly involves three parties to protect the interests of all parties. There are different types of surety bonds, and these are designed to suit various startups. Before you obtain a bond you must first identify if you need it.