Purchasing a Surety Bond: How It Helps and Why You Need It

Are you planning on starting a business? Here’s why you should purchase a surety bond and how it can help you sustain your startup.

Starting a business is a huge thing. You’re essentially investing your life’s savings to kickstart your career as a business person finally. When you’re starting out, you need to sign a lot of legal documents that will help protect your company and regulate your finances in the future.

One of these legal documents is a surety bond, a contract that needs to be purchased by all entrepreneurs when they first start off.

What Are Surety Bonds?

Surety bonds can be defined as legal contracts that are established between three different parties—the principal, the obligee, and the surety. The surety promises the obligee that the principal will act based on the terms and conditions in the bond.

While they aren’t compulsory for anyone looking to form a startup company, it is still something that will help them get started; in a way, it will help businesses tackle challenges throughout their work. Now let’s define the three parties involved so that you can better understand the concept of a surety bond.

Surety bonds fall into two main types: commercial and contract bonds. Commercial bonds are mainly for business owners, while contract bonds are for those working on construction projects. This contract will protect you from losses and make sure you follow all rules and regulations set out by the government for business owners.

Since we will be focusing on helping business owners, we will frequently refer to commercial bonds throughout this article.

Principal

The principal is you or anyone who owns the startup company. They are usually the person who buys the bond to start work according to the regulations. The bond ensures the principal is protected from losses. Startup companies can sometimes be risky because there will be a lot of money involved.

Obligee

The obligee is usually a government agency. These government agencies try to regulate different agencies so that they don’t incur any losses in the future. The obligee is the one who needs the bond that the principal buys. That way, they have the terms and conditions required to begin monitoring the actions of the said principal.

Surety

Of course, at some point, companies will fail to comply with the terms and conditions of the bond. For instance, say a principal fails to follow the rules and regulations of the bond. This is where the surety comes in. The surety is an insurance company. In this case, the obligee can file a complaint against the principAl. If they find proof of losses, a surety will step in and compensate damages on behalf of the principal.

All in all, this is how a surety bond works. So as a startup owner, why would you need such a bond? Let’s look at ways it can come to your aid.

1. It Is Mandatory for Certain Businesses

Although we did say that it’s not always necessary for businesses to acquire a surety bond, certain companies are required by the government to get a bond. Upon getting a surety bond, you as the principal can get the license needed to start your desired company.

Some businesses that need a surety bond include mortgage agencies, wine brewing companies, and travel agencies. Before beginning your startup, you should research whether or not your area of interest requires a surety bond.

2. It Upholds the Reputation of Your Company

Like the businesses mentioned above, agencies that provide services to people (for example, healthcare professionals) require surety bonds to operate. This is mainly because they are coming in direct contact with sensitive professions, where problems often occur.

Surety bonds can be seen as a set of rules—and therefore, this ensures that your employees abide by those rules to avoid running into problems. In this way, surety bonds can help uphold the company’s reputation. Your company will be known to provide honest and sincere services to those who require it; your employees are legally obligated to follow the terms. Therefore, it’s less likely to violate any of those.

3. Gives Your Business Credibility

So you build a business from the ground up, and you provide people with the proper services. Of course, customer reviews are an essential aspect of establishing a good image of your company and building a loyal customer base. However, this is not enough to make you appear trustworthy to newer customers. In the worst-case scenario, this could be one of the reasons why startups may fail.

This is where a surety bond comes in. Believe it or not, this bond can show people that your business is credible. This is perfect for startup companies since they are new and don’t have many reviews to back up the quality of their services. Again, we must refer to the fact that the surety bond is a set of regulations. It serves as a sort of certification. This proves to your customers that you take your work seriously and are committed to providing honest and ethical services to them.

In Conclusion

Taking the initiative to start a startup is huge. Many costs and effort go into the process, but the stress doesn’t stop. There’s still a long way to go for new startup owners. It’s crucial to find ways to secure your company.

Surety bonds are one of the most straightforward and effective ways to do that. I hope this article helped you understand whether you need to consider purchasing a surety bond for your startup. Surety bonds are one of the most straightforward and effective ways to do that. Good luck!