Bonds

Image by pictavio from Pixabay 

by Joshua Botello

If you have ever asked: “what the heck is a bond?” don't worry, you aren't alone. Basically, bonds are contracts typically between three parties, protecting losses caused by one of the party’s not meeting contractual obligations. Here are the major types of bonds and when you might need them in your line of work.

Surety Bonds

So, if you’re a construction business then the surety bond would be for you. The surety bond is between your company, the customer, and the guarantor (the issuer). You pay the guarantor to take out the bond. If you fail to meet the contractual obligations to your customer, then the guarantor pays the fee or the fine to your customer. The SBA has resources for providers and even guarantees surety bonds in order to help small businesses compete for jobs. It’s worth checking to see if they can guarantee your surety bond.

License / Permit Bond

This type of bond falls under the umbrella category of Surety Bonds which are sometimes referred to as “license bonds”. License and permit bonds are bonds that are specifically required by government bodies. This can be on the federal, state, and municipal level, as part of the licensing process for your business. Each profession will have its own license bond. Depending on needs, this bond can be valid for up to one to five years. Basically, the bond guarantees that your business will act according to all regulations and laws, protecting both the government (state, federal, municipal) and customers.

Contract Bonds

Contract Bonds AKA “performance bonds”, serves as a guarantee for the fulfillment of your contractual terms. A performance or contract bond is a particular type of surety bond. Its purpose is to assure a standard of performance agreed upon by the contractor and the customer. The contract specifies the expected time of completion, materials to be used, and a multitude of other factors to meet the customer’s requirements. It can be issued either by a bank or an insurance company and is generally purchased per project, by contractors, as part of the requirements for securing a job. Among other things, it protects the customer in the event of an incomplete project or instances in which the contractor goes bankrupt before the project is complete.

Fidelity Bonds

The word “fidelity” itself refers to loyalty, reliability, and faithfulness. The fidelity bond is called basically an insurance policy for small business owners to protect themselves from the dishonest or fraudulent acts committed by employees. This can include stealing or damages caused during the course of work. For example, if a home cleaning service stole money or property during a cleaning session the fidelity bond would be paid to recover the loss to the business if they were sued or in litigation. The fidelity bond can also cover if someone misappropriates funds from payroll or retirement accounts. Third-party bonds also exist to protect companies from fraudulent acts made by contractors.

While some bonds are used for specific industries, it is always prudent to explore your options to manage the risk of your business. You can always consult with a financial advisor to determine which bond may be right for you and protect your business.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.