Surety bonds provide a wide range of support for business owners. While they may seem like just another expense to some small business owners, they actually provide a number of key benefits like providing customers with a sense of confidence in the bonded company.
Surety bonds can give your business a competitive advantage and help you stand out in your industry. There are a number of reasons why customers prefer to work with companies who have taken the time to obtain this additional form of insurance to demonstrate the integrity of their services.
If you are on the verge of starting a business or you want to put a better level of security in place, consider a few key reasons you need these bonds in place.
Surety Bonds Ensure Your Customers are Safe
Surety bonds give your customers and clients the support they need to know they have a backup in case an error leads to a loss. Customers often expect companies to carry bonding. If you do not have it, chances are good your competitor does.
Surety Bonds are in place to ensure contracts for services are completed, even when the company defaults, to protect the customer from financial loss. There are four main types of surety bonds:
- Payment Bond: This ensures payment for any subcontractor or supplier associated with completing the job or service.
- Bid Bond: This ensures the bidder will provide the payment and performance bonds once awarded the contract.
- Performance Bond: This ensures that completion of the contract will be performed according to the conditions and terms of the contract.
- Ancillary Bond: Ensures that all requirements of the job or service are performed.
It Reduces Your Financial Risk
If a project goes bad, a mistake is made or something else happens and the finished work is not what was promised, your surety bond can help to minimize the out of pocket expenses you have to pay to the customer.
Contractor default is an unfortunate, and sometimes unavoidable, circumstance. In the event of contractor failure, the owner must formally declare the contractor in default. The surety conducts an impartial investigation prior to settling any claim. This protects the contractor’s legal recourse in the event that the owner improperly declares the contractor in default.
When there is a proper default, the surety’s options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond. That owners have been shielded from risk is evidenced by the fact that surety companies have paid more than $10.1 billion due to contractor default since 1995, according to The Surety & Fidelity Association of America, Washington, DC. In 2009, the surety industry paid more than $84.4 million in losses on private construction and more than $1.6 billion since 1995.
One of the lesser known benefits to surety bonds has to do with your customer’s payment. If and when a payment does not happen, a surety bond may guarantee that payment to you. Your policy needs to be specifically written for this benefit in order for it to be present.
A Bond May Be Required
Some professionals who must obtain a license to operate in the state or local jurisdiction may be required to obtain a surety bond. In fact, having surety bonds may allow you to work in areas where your competition without a bond cannot.If you are in the construction industry and are seeking work from the federal government, a surety bond is probably required. Additional industries that may require surety bonds are financial, automotive and other specializations that require licensing from a state, federal or municipal government.
Bonds are Inexpensive
In most cases, surety bonds are not nearly as expensive as the other types of insurance you may have. And, they tend to offer far more benefits than drawbacks.
Small business owners are always looking for ways to distance themselves from the competition. Surety bonds give consumers added protection and provide businesses with a boost of credibility. Telling people you care about consumer protection is one thing — having a surety bond that backs up that statement is something altogether different. Plus, not just anyone can get a surety bond, and the rigors of securing one indicates the relative financial health and legitimacy of a company.
There are also surety bonds dedicated to helping protect entrepreneurs and small business owners. Fidelity bonds can insulate entrepreneurs from financial ruin in the unlikely event their employees steal or somehow break the law or harm consumers.
Surety bonds can help companies attract and retain customers while at the same time safeguarding their interests.
Surety bonds should not be something you overlook. Take the time to consider what they are, how they can fit your needs and exactly how affordable they can be. It may be just what you need to gain the confidence from your customers or clients to land the way.