Does My Startup Business Need a Surety Bond?

surety bond for startup

Opening a business means checking lots of different boxes to get your startup fully compliant with all local, state, and federal laws. One box you may need to check is getting a surety bond. Some businesses need them while others don’t. In this blog, we walk you through everything you should know about surety bonds and startups. 

What Businesses Need a Surety Bond?

Surety bond requirements can be imposed by cities, counties, states, or the federal government. They can also be included in any formal contract between two parties, and they are especially common in the construction industry. For those reasons, it’s impossible to say definitively what businesses will need surety bonds. A business that needs a bond in one state may not need one in another. However, if you plan to open one of the following types of businesses, there is a strong likelihood you will need to obtain a surety bond:

  • Construction contractor
  • Health club 
  • Investment advisor
  • Mortgage broker
  • Pest control provider
  • Driving school
  • Waste hauler
  • Motor vehicle dealer
  • Liquor store

Keep in mind that this list is far from complete. There may also be states where a health club operator, to use just one example, does not need a surety bond. Given the unpredictable nature of bond requirements, business owners should never make assumptions about when they do and don’t need bonds. Always investigate what your exact bond requirements are. 

How to Determine Surety Bond Requirements

If your business needs a surety bond, it will probably be a requirement for obtaining a business or professional license. Review your license requirements carefully, but be aware that you may need a surety bond to meet other obligations for a new business. 

If you need help making sense of your surety bond requirements, reach out to the experts at Viking Bond Service. We can help you determine your bonding needs, explain what bonds will mean for your business, and assist you with securing all the surety bonds you need. 

What is a Surety Bond?

Anyone who needs a surety bond must understand how these legally-binding agreements work. To begin with, there are three parties involved with all surety bond types:

  • The Principal must obtain the bond and accept liability for all claims.
  • The Obligee requires the surety bond and has the right to file claims against the bond for damages caused by the principal
  • The Surety underwrites the surety bond. They guarantee payment to the obligee for the valid claims, but since the principal has liability for that claim, the principal must repay the surety the claim amount with interest and fees added. 

Consider this example of a surety bond in action: an upstart car dealership obtains a bond as part of the licensure process. Later, that dealership sells someone a vehicle with the odometer rolled back – a violation of state law. The car buyer then files a claim against the bond for the sale price of the vehicle. The surety investigates the claim, and after verifying everything, the surety automatically settles the claim in full. Finally, the surety collects the amount that was paid to the obligee from the principal, which may involve lawsuits if necessary.

Why Do I Need a Surety Bond?

The reason most states require surety bonds for small businesses is to encourage those businesses to follow all applicable rules and regulations. Surety bonds create an incentive to abide by the law (or contractual obligations) by holding the principal (the business with the bond) financially responsible for any misconduct. 

Surety bonds also create a system through which anyone harmed by the principal can pursue a claim for damages. By ensuring that people can get compensated for the damages they suffer, surety bonds help to streamline justice and safeguard the public good. The purpose of all surety bond requirements is to create trust between two parties by enforcing accountability from one party to the other. 

How to Obtain a Surety Bond

When your small business has mandatory bonding requirements, you can’t open your doors or serve a single customer until you can prove you have a bond that meets all the necessary requirements. That’s why it’s important to fulfill these requirements ASAP. Obtaining a bond works differently depending on the type of bond and the bond company, but these steps are usually involved:

  1. Complete a bond application. Business partners and anyone with more than 10% ownership in a business will also need to submit applications. 
  2. Agree to undergo a credit check.
  3. Provide a copy of the bond requirements and any other documentation the underwriter requests.
  4. Wait to receive a quote for the bond premium (e.g. the cost of a surety bond). 
  5. Pay the premium and sign all the attendant paperwork. 
  6. Provide the obligee with a document proving you have bond coverage.

Surety Bonds for Startups: Tips for Entrepreneurs 

Any small business that needs a surety bond can take some proactive steps to avoid bond problems and extra costs. Make bonding as easy on your business as possible with these tips:

  • Avoid claims – Claims can be very expensive. Do everything possible to avoid anything that could result in claims against the bond. 
  • Renew regularly – Most businesses need to keep bond coverage active continuously, which means renewing the bond on an annual basis. Stay on top of the renewal deadlines, and budget for the premium. 
  • Improve credit – The more your credit goes up the more your bond premiums go down at renewal. Keep bond costs low by keeping improving or preserving your credit standing.
  • Seek supplementary bonds – Fidelity bonds protect small businesses from various types of employee misconduct. They are voluntary to get, but many businesses choose to obtain fidelity bonds (such as business service bonds) to protect against a common risk. 
  • Find a bond partner – When a business needs bonds for years to come, it helps to have a bond partner who can make the process simple, straightforward, and stress-free. The right partner can be a huge asset to businesses that depend on having surety bonds. 

Viking Bond Service – Serving America’s Small Businesses 

Our nationwide surety agency can help any small business acquire whatever kind of surety bond they need. We are the partner that entrepreneurs are looking for. Request a bond quote at your convenience. It’s no-cost, no-obligation, and takes under 24 hours in most cases. Our team is also here to help your small business navigate the bonding process. Rely on Viking Bond Service for whatever help you need. Contact us with your questions or call 1-888-2-SURETY (1-888-278-7389).