What is a surety bond?
Thinking about going into business on your own? You may need to apply for a surety bond—a financial product meant to protect you and your customers. In many professions, you will be required to have one.
In some cases, consumers may also take out a surety bond—as with the security deposit bond and lease guaranty bond offered by Jetty. But for now, we’ll stick to the more typical business or commercial context. So let’s go back to your new business.
When you hang out your shingle, your customers expect you and your employees to:
- Keep the promises you make when you sign a contract
- Fulfill the duties of your project or profession
- Follow all laws and regulations
But what if something goes wrong, you are held responsible—and your customer wants you to pay to make things right? Surety bonds to the rescue.
What is a surety deposit bond?
A surety bond is a special type of “insurance-like” agreement among three people or parties (vs. a typical insurance policy, which is an agreement between only two parties—the insurer and the insured):
- A principal—that’s you, the person performing the work
- An obligee—your customer, the general public, a project owner or a state licensing agency
- A surety company—which pays the obligee on your behalf; usually an insurance company. Then, you pay back the surety company or insurer.
Surety bonds are a mix of financial products. For you, as a business owner or contractor, they serve as a type of credit. For your customers or the person who hired you to work on a project, they are a type of insurance.
How do surety bonds work?
Let’s say you start a pet-sitting business and hire three employees. You buy a surety bond with $300,000 in coverage. If your employee is caught stealing large sums of money from a customer’s home, the surety company pays the theft victim to compensate for the loss. You then must repay the surety company.
Or maybe you are an electrician. If you are hired by a construction company to install wiring in a new school, you are expected to follow safety codes and meet project deadlines. If you don’t meet expectations, a surety bond pays the construction company the costs to hire your replacement.
How much does a surety bond cost?
It varies. Rates can range from 1% to 20% of the total bond amount. The surety company will look at your credit, total assets, type of business and many other variables when setting a price.
What businesses are required to have surety bonds?
- Auto dealerships
- Home care agencies
- Travel agencies
What about other types of business?
Anyone who needs a license or permit to run their business should look into surety bonds. In fact, they may not be able to open up shop without one.