(Editor’s note: Today’s guest column comes from Alex Levin. It’s on a topic that I frankly know almost nothing about but which is very important to some small businesses. I hope you find it helpful.)

For those finally fulfilling their lifelong dream of becoming their own boss, starting a new business requires patience, determination and…paperwork. From legal documents to licensing requirements, understanding what is necessary to open your doors can be confusing. In addition to filing the typical paperwork, such as obtaining a business identification number or federal tax ID, certain industries are required to obtain a surety bond in order to operate. Although commonly required, much is unknown about their function, cost and protection. To help clear up the mystery behind the bonding process, the following is an overview into surety bonds.

Definition

Surety bonds are contracts between three parties:

• An obligee: the entity (typically the government) requiring the bond
• A principal: the individual or business purchasing the bond
• Surety: the agency who is selling and providing the bond.

The protection of surety bond in most cases falls on behalf of consumers. Should the bonded business be at fault for acts protected by the bond’s stipulations, a claim can be filed against the bonded business.

Surety Bonds Types

There are thousands of surety bonds that protect consumers in industries ranging from health care to sales and finance. Researching local government regulations is a quick way to assess if your new business is required to be bonded. Bonds are typically divided into three main categories: commercial, contract and court. Contract bonds primarily refer to work on large construction projects, while court bonds secure financial compensation until an official ruling has been filed. The category of commercial bonds is the largest category with the widest range of industries included. An online search of commercial bonds surety bonds or searching surety bonds by state is a quick way to gauge what is required of your new business.

Getting Bonded

Prior to obtaining a surety bond, small business owners should remember:

1)   Claims filed against surety bonds will be your responsibility. Although surety agencies technically protect the obligee from certain fraudulent activities, once initial reparations are paid, the surety company will seek reimbursement from the principal – or the individual/business who obtained the bond. This is the main difference between surety bonds and insurance. Insurance helps protect consumers in times of hardship or loss. Should an event occur that is covered by insurance, the agency who sold the policy will pay damages. On the other hand, while surety bonds do protect the obligee, or in some cases the consumer, the bonded company will always be held responsible to repay any valid claims that are filed against them. Therefore it is necessary for the bonded business to practice ethically and within the bond’s protections.

2)   Surety bonds are not a fixed fee. Prior to selling a bond, a surety will perform a risk assessment of new businesses that includes investigating the financial security of the applicant. Those with less than average credit will pay higher rates – anywhere from 5 to 20 percent of the bond amount.

3)   Bonding rates can fluctuate based on one’s geographic area. Different government agencies have established regulations for certain bond types. Many even have set bond amounts required for businesses to operate. For example, certain notaries are required to obtain a $5,000 bond while other jurisdictions specify they acquire a $10,000 bond.

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Alex Levin is a writer and marketing specialist for several nationwide surety agencies. For more information, visit www.jwsuretybonds.com