Small Business Resource

Surety bonding is an important part of many businesses today and should be considered just one more step in the process of setting up your own company. In fact, most states and localities (not to mention the federal government) require bonding for construction companies, janitorial services, used car dealerships, nursing homes, pharmacies, mortgage brokers, and repair services, just to name a few.
Surety bonds are basically an agreement between three parties: the party which is requiring the bond (generally a government), the party who is the subject of the bond (and is paying for the bond itself), and the bonding company who executes and maintains the bond. After the bonded company purchases the surety bond, if there is ever a valid claim on it, the surety company provides restitution or compensation to the party who required the bond and then pursues reimbursement from the company who was the subject of the bond.
It’s important to note that surety bonds are not a form of insurance since the company who purchases the bond must also pay the full amount in the event of a claim and has no coverage or reimbursement due to the bond. Instead, surety bonds are a form of credit and are thus treated as such. Companies required to become bonded are subject to a credit check and financial review to determine if they are financially solvent enough to support the full amount of the bond. If a company has credit issues, it can pursue a bond from a company specializing in subpar credit bonds but the purchase price of the bond can be as much as two times higher than a bond purchased by a company with good credit.
Bond amounts vary from state to state and industry to industry. Looking at an example surety bond in Missouri, a mortgage broker is required by law to maintain a bond of $25,000 whereas the surety bond in Illinois is only required to be $20,000 for the mortgage broker bond. Missouri-based private detectives must be bonded for $10,000, and Illinois roofing contractors also must keep a bond of $10,000. Bond prices vary depending on credit status and amount, not to mention type, but most bonds cost only a few hundred dollars to purchase. Not bad for the piece of mind of knowing that you’re complying with the law and providing your company with an opportunity to inspire consumer confidence with the phrase “fully licensed and bonded.”