Getting the proper insurance coverage and licenses is just a start. To run a successful business, you’ll also likely need the right bonds. So, what are bonds for small businesses? Bonds guarantee that your small business will perform the agreed-upon services.

For many small businesses, surety bonds are required and help protect third parties like customers. So, if you run a hair salon school and one of your students reports that they didn’t receive services after paying, they can file a claim and receive reimbursement from your bond. However, you’ll then need to reimburse your bond company.

Surety bonds are important because they can help protect your small business’s reputation by guaranteeing you will follow the rules and regulations applying to your business/industry. There are also a few other types of bonds your small business may need, including:

  • Fidelity bonds: These help protect businesses’ finances if they experience employee theft or fraud.
  • License bonds: In many cases, when you get business licenses to operate, you’ll also need to get bonds to go with them. For instance, if you get a liquor license, you’ll also need a liquor tax bond. This bond acts as a promise that you’ll pay your taxes.
  • Business service bond: This bond helps protect your customers if your employees steal from them. This is important if you regularly send employees to work at a customer’s home.

Still not sure if you need small business bonds? Check out the top three reasons small businesses typically need bonds.

1. Bonds are required to fulfill most contracts.

Surety bonds protect your clients’ investment in your small business when they work with you. That’s why you should expect larger clients to require them. This requirement will be stated in a legally binding contract between you. Both bonds and insurance let your clients know that you’re a reliable and credible business. With bonds in place, your clients will be reassured that they won’t lose money working with you.

For example, surety bonds reimburse your client if you don’t deliver your agreed-upon services. So, if you start a landscaping project with a client and don’t finish it, they can file a claim with your surety bond for incomplete work and receive compensation. They can then use this compensation to hire another company to finish the job. However, for each claim against your bonds, you’ll need to reimburse your bonding company.

Surety bonds cover your customer’s investment if something goes wrong, which can help keep your business in good standing with them. They also show that your small business is financially stable. You can expect most government institutions to require bonds before they work with you.

2. Certain industries require bonds.

For some small businesses, bonds are mandatory for operating. For instance, surety bonds are often required in the service industry with restaurants. Surety bonds are also common among independent contractors like plumbers.

On top of these, some other small businesses that likely need bonds to operate include:

  • Personal services such as hair salons or barbershops, health clubs and patient care
  • Professional services such as collection agencies, real estate agents and escrow agents
  • Private schools
  • Manufacturers, distributors and retailers of alcohol
  • Notary publics
  • Construction companies

Remember, surety bonds aren’t the only bonds you’ll need to operate. You may also require fidelity or license bonds or certain small business insurance coverages like workers’ compensation insurance. Each state has different insurance requirements, so before you finalize your insurance coverage, you’ll want to make sure you’ve checked the requirements in your area.

3. You’ll need bonds if you offer employee benefits.

If you have employees, chances are you’re offering at least some benefits to them. Whether it’s a 401(k) or pension plan, you’ll need bonds in place to cover these employee benefits. In fact, the Employee Retirement Income Security Act (ERISA) states that “every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan should be bonded.”

So, if you offer employee benefits, ERISA will require you to carry bond coverage of:

  • At least 10% of the plan assets that are handled.
  • A minimum of $1,000 and a maximum of $500,000 or $1 million for retirement plans that hold company stock.

These bonds insure your plan participants against fraud, dishonesty or even theft. So, if the plan participants don’t receive benefits from you due to theft, they can file a claim against you and receive compensation from your bond.

How Do You Get Bonds for Your Business?

Once you’ve decided to get bonds, your next step is to find the ones that fit your business’ needs. You can do this by working with a specialty bond company or your insurance company. For instance, our specialists can help determine what bonds you need and how much they’ll cost.

Some factors can impact how much you’ll pay for your bonds, including:

  • Industry
  • Type of bond
  • Credit score
  • Financial history
  • Bond’s value

The Small Business Administration (SBA) also has a surety bond program for small businesses. They can also work with you and determine the bond type you need.

Whether you’re running a hair salon, restaurant or construction company, most small businesses have a least two things in common: They need insurance and bonds to secure long-lasting success with clients.

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