Surety Bond Basics For New Business Owners

13 January 2015
 Categories: Business, Articles

When you are ready to take the plunge and start a small business, you may need to apply for licenses and bonds in order to comply with state and local regulations for your industry. Many states require that businesses that offer specialized labor obtain a surety bond before providing services. This type of bond is an agreement between three parties: you, your client and a surety bond agent. If you are a first-time business owner the following guide can provide you with a primer on surety bonds.

Surety Bond Basics

Also known as performance bonds, a surety bond assures the public that you are a responsible business owner that will not behave in an unethical manner or cause any damage to customer property. Surety bonds also provide a guarantee that your company will fulfill the terms of contracts with clients.

For example, if you are starting your own landscape designing firm, you may need to purchase a surety bond so your clients can rest easy that you and your employees will not leave a project unfinished or damage the lawn. Clients that feel you did not fulfill a contract can file a claim with the surety bond agency for financial compensation.

Some states require that you purchase a surety bond as a condition of obtaining or renewing a business license. Other types of businesses and sole proprietors that typically need to purchase surety bonds include private investigators, auto dealers, electricians, real estate agents, plumbers and construction firms. In fact, the majority of public construction work in the U.S. is protected by surety and other types of bonds.

In some states, if you are a new tenant in a commercial property, you can purchase a surety bond to satisfy requirements for providing the landlord with a security deposit.

Bond Amounts and Fees

The amount of protection your bond provides depends on state regulations and how much of a financial cushion you think your business needs to protect against unforeseen circumstances such as damage caused by an unscrupulous employee.

States mandate minimum bond amounts and the fees that agents charge for issuing bonds. Depending on the type of business you own, you may only need a surety bond of $10,000. However, a large business may need to purchase a bond worth over a million dollars.

Typically, the fee you pay a surety bond agent is anywhere from 0.5 percent to two percent of what your bond is worth. The price may also vary based on your company's credit rating. Some agents offer financing plans for clients to spread out the cost of a bond fee over several payments.

Applying for a Surety Bond

Many surety bond agents enable you to apply online or download an application so you can get the ball rolling on obtaining a bond as soon as possible. Online applications also enable you to pre-qualify and receive a bond fee estimate quickly.

When you apply for a bond you will be required to submit detailed information on your business such as:

  • Previous history of denied or canceled bonds
  • Notification of previous licenses suspensions
  • Criminal background history
  • Credit report
  • List of any previous bankruptcies
  • Membership in professional trade groups
  • List of states where you are licensed to conduct business
  • Basic facts about your general liability insurance
  • Contact information for all business partners
  • Bank account and credit line history

Bond Agent Qualifications

Surety bond agents must hold a state license in order to issue surety bonds. When you need to find out specific information regarding laws about surety bonds, contact your state insurance commission.

If your firm provides a service to the federal government as a contractor, you must use a surety bond agent approved by the U.S. Department of the Treasury. Check out sites like for more information.