Importance of Surety Bonds

Importance of Surety Bonds

importance of Surety BondsThis article talks about surety bonds and the importance of surety bonds to an entrepreneur.

A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.

Source: Wikipedia

Why are surety bonds important to entrepreneurs?

Entrepreneurs know they have to keep track of a number of concerns when starting a new enterprise. Whether they be related to time, money or effort, entrepreneurs need to keep these affairs in check. From time to time, though, entrepreneurs might forget about about some crucial concerns that come along with starting a business. One such concern is the need for surety bonds, which are often required before entrepreneurs can apply for business licenses in many industries. As such, this article will explore the five key reasons why surety bonds are important to entrepreneurs.

1. Surety bonds are often prerequisites to business license applications.

Government agencies across the nation establish surety bond requirements to regulate industries and protect consumer interests. When a business owner purchases a bond, he or she agrees to meet the bond’s terms, which typically require compliance with specific industry regulations. For example, most states require auto dealers to purchase a surety bond before they can be licensed to sell cars. If an auto dealer does not qualify for an auto dealer bond, then the dealer cannot get a license.

2. Surety bond premiums can be expensive.

Bonding can be a hidden cost to starting a business. Some surety bond types, such as contract bonds, can cause financial setbacks entrepreneurs don’t expect. Most surety providers require premiums to be paid in full upfront, so until an entrepreneur pays for the needed bond, he or she cannot not file it with the government and thus cannot get a business license. Without the funds to pay for a surety bond, an entrepreneur’s entire timeline could be delayed.

3. Surety bonds are legally binding contracts that hold entrepreneurs accountable.

Although surety bonds are an insurance product, they do not provide financial protection to the principal as do most insurance policies. Many business owners don’t realize that in purchasing a surety bond, they’re actually signing a legally binding contractual agreement that protects consumers. As with any other contract, you should fully understand the legal terms you’re agreeing to when purchasing a surety bond.

4. Failing to maintain a surety bond according to law has consequences.

If the government agency that regulates your profession’s licensing requires you to meet certain bonding expectations, you must fulfill them. If you try to run a business without being properly licensed and bonded, you could face penalty fines, license revocation or even legal action.

5. Surety bonds can be used as a marketing tool.

You’ve likely heard business owners advertise their enterprises as being licensed and bonded. When customers know that a business is legally licensed and bonded, reassures potential clients that your enterprise is financial stable. Clients also feel reassured knowing that the business they work with is backed with the financial guarantee of a surety bond.

Surety bonds might seem like a mystery at first, but entrepreneurs who have a basic understanding of their importance will feel confident when they need to get bonded.

This article comes from, a surety bond company that issues bonds to help entrepreneurs get their enterprises up-and-running as soon as possible. As a part of its educational outreach program, provides informational articles to help entrepreneurs understand the legal implications related to bonding and business start-ups.


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