How Small Businesses Get Bonded

Mary Gormandy White
Construction contractors must be bonded.

Are you interested in learning about what's involved in getting bonded for small business?

What is a Small Business Bond?

A small business surety bond represents a guarantee that the covered business will honor contracts into which it enters. Getting bonded for small business involves acquiring a third party promise to pay if your organization does not fulfill its contractual obligations. This is done by purchasing a surety bond from a bonding company.

Depending on the type of business you operate, getting bonded may be a requirement in order to get a license from the state or municipality in which you operate. In some cases, certain customers may require you to get a bond before they will do business with you. Most contractors are required to carry bonds, as do most companies whose employees call on customers in their homes.

Different Types of Small Business Bonds

There are several different types of surety bonds, including:

  • Bid Bond: When responding to major request for proposals (RFPs), especially those issued by large companies and government agencies, it's often necessary to take out a bid bond. This type of bond represents assurance that your company will accept the contract and complete the work upon receipt of the contract award.
  • Indemnity Bond: An indemnity bond represents a third party's promise to provide reimbursement for actual losses if your company does not perform the work specified in the contract or if your organization does not pay the vendors who provide services related to carrying out the work specified in the contract.
  • License Bond: In many states, particular types of businesses must be bonded in order to become licensed to operate. For example, in Alabama, private schools are required to have a license bond in order to operate. When a potential new school submits an application for licensure in the state of Alabama, the entity must submit proof of both a school license bond and a representative's bond with the application form.
  • Payment Bond: A payment bond represents a guarantee that your organization will provide proper payment to the subcontractors and vendors that provide materials used during the completion of a particular contract.
  • Performance Bond: This type of bond represents an assurance that your company will carry out and complete work in a manner consistent with the terms and conditions specified in a contract into which it has entered.

Where to Get a Small Business Bond

Many small businesses that need surety bonds are able to purchase them from their insurance companies. Even though some business insurance providers are able to sell bonds to their small business customers, it is important to remember that having a bond does not take the place of small business insurance. It's essential to make sure that your company has sufficient business insurance in place in addition to taking care of bonding requirements. Not all insurance companies are able to take care of customer bonding needs. There are a number of companies that specialize in meeting the bonding needs of small businesses throughout the United States. JW Surety Bonds and South Cost Surety are two of the leading online bonding companies. Both organizations have online application forms and toll-free telephone numbers that you can use to speak with a bonding specialist.

Is Getting Bonded for Small Business Something You Need to Do?

If your state requires license bonds for companies in your industry, getting bonded is mandatory. If you want to do business with customers who require vendors in your industry to carry bonds, then you will also need to take care of getting bonded. The good news is that most bonds are quite affordable and the application forms are not difficult to complete.

How Small Businesses Get Bonded