Often times the cost of doing business will include the purchasing of surety bonds. These types of bonds are quite confusing to people that don’t understand the premise. Sometimes, this type of bond can be confused for business insurance. However, business insurance and a surety bond have many differences. To understand why and how a bond is different from an insurance policy, it will be important to discuss how a surety bond works.
While there are several types of bonds, a general description of a surety bond is a financial transaction that ensures that a business or a principal will be in adherence to stipulations or regulations made by the obligee. In essence, if a business that hires a construction company or a government agency is providing a license or permit, these constitute the obligee and they will have various regulations that the hired business will need to operate under. A surety bond makes sure that the principle carries out all the rules and requirements set out in a contract or in a license. If those rules and regulations aren’t followed, a financial penalty can be assessed and paid out by the issuer of a surety bond.
One of the most common types of bonds a business will need to secure are license and permit bonds. For example, in most cases, in order for a provider of higher education to license in a particular state, they will have to purchase a surety bond. In other cases, contractors may have to purchase a surety bond in order to be licensed by the state as an electrician, plumber, roofer or other type of contractor. In addition, when a business hires a construction company, a construction surety bond will need to be purchased.
The real question that many businesses have, especially with how high small business insurance for a small business can be, is how much will a surety bond cost. Depending on the amount and type of a bond, whether it’s a license and permit bond, a construction bond, a court bond or fidelity bond, cost can vary. Riskier bonds, such as a court or fidelity bond, could require the purchaser to pay anywhere from 10% to even 15% of the total bond. Small license and permit or contract bonds may only have a purchase price of 1% to 5% of the actual bond itself.
Many business owners understand that, just like things such as workers compensation insurance, the purchasing of a surety bond is the cost of doing business. A bond of this type will ensure that the company getting a license or being hired to do a job will carry out those duties according to all of the rules set out in an agreement. This protects the company, the business that hired you, the organization that offered a license or permit and it protects the people that benefit from the services or products provided.