When it comes to securing your business and its activities, one important issue to include — as you consider your business insurance needs — is that of “bonding.”

Though you may associate the word “bond” with investments (or even “007”), when it comes to business, bonds are quite different: Instead of being a debt instrument or a dashing British spy, a business bond is an important risk management tool, offering protection when certain types of agreements are breached.

Here’s what you need to know about protecting your small business with surety and fidelity bonds — which are the two main types of business bonds.

What Is a Business Bond?

A business bond, while providing a form of risk protection, is separate from your regular business insurance. Basically, business bonds back up broken promises — whether those issues arise from the way in which a service is provided, or from an employee’s dishonest actions.

In some lines of work, having a bond is a requirement of doing business; in others, bonds are an important component of the company’s overall risk management.

The two main types of business bonds are surety bonds, which protect your clients or customers, and fidelity bonds, which protect your business.

Surety Bonds

A surety bond is a contract among three parties: the obligee, the principal, and the surety:

  • The obligee is the person, business, or organization that requires, and collects under, the bond.
  • The principal is the person, business, or organization carrying out the work — typically the small business owner.
  • The surety company or insurer that issues the bond is the party that insures the principal’s work is carried out.

With a surety bond, if the principal doesn’t complete the project as specified, the surety company or insurer pays the bond amount to the obligee, who may then use it to hire someone else to complete the work. Then — and this is where a surety bond differs from insurance — the principal is asked to reimburse the surety company or insurer.

Fidelity Bonds

A fidelity bond helps protect your business from financial loss due to an employee’s dishonesty, including losses from theft or embezzlement, which regular business insurance policies don’t typically cover.

Blanket fidelity bonds cover all employees of the business. If you own a housecleaning service and one of your cleaners steals money or property from a client while cleaning their home, your fidelity bond can reimburse you for reimbursing your client.

What Types of Bonds Are Available for Business Owners?

Different bonds serve different purposes and different industries. Here are eight common business bonds:

Commercial Surety Bonds

1. Non-Construction Performance Surety Bonds help ensure the fulfillment of a contract’s obligations, and apply to service companies, such as food service operations or bus companies.

2. License and Permit Bonds: Municipalities, states, and other jurisdictions require these bonds prior to granting licenses or permits to operate a business. These can apply to businesses ranging from contractors, to real estate and insurance brokers, to wineries and fitness clubs.

3. Probate and Judicial Bonds: Probate bonds are required by the court to guarantee the honest behavior of fiduciaries acting on behalf of an estate. Civil court proceedings may require judicial bonds, specific to seeking special rights or remedies.

4. Public Official Bonds guarantee that officials such as notaries, tax collectors, and treasurers will carry out their duties honestly. They are purchased by an individual holding public office, whether full-time or part-time.

Contract Surety Bonds

5. Contract Surety Bonds include bid, payment, and performance bonds designed to meet the needs of general, highway/heavy, trade, and specialty contractors.

Fidelity Bonds

6. ERISA Fidelity Bonds are required by federal law when small businesses offer certain pension and benefit plans.

7. Crime/Fidelity Coverage can help manage the risk of loss from crimes including theft, forgery, or computer and funds-transfer fraud.

8. Business Service Bonds help defend against losses due to employee theft while your employee is carrying out services for customers.

How to Buy a Surety or Fidelity Bond

Surety companies or bonding agencies, and many multi-line insurance companies, offer bonds for business. To determine whether or not you need a particular type of business bond, first learn your state’s requirements for bonds and your business. You can do a quick internet search, ask the regulatory body governing your industry, contact your state insurance regulatory organization, or ask your insurance company.

Next, you’ll make an application for a bond, either through your agent or on your own. In some cases, you can submit your application electronically. The cost of business bonds will depend on a number of factors, including the coverage required, and the cost is often calculated as a percentage of the coverage amount.

Determining your business bonding requirements can be complicated. It pays to rely on a trusted professional to help you choose the bond or coverage that will best meet your needs.