Becoming bonded is a very important first step for most business owners because it's a feature of your business that makes you appealing to potential customers, and gives them a good reason to choose you over a competitor. The fact that your entity is bonded gives clients a certain amount of confidence that you will live up to the terms of the bond and therefore represents an assurance of reliability.
Another driver that forces you to think about how to become bonded is the fact that the licensing of your business may require that you become bonded, and licensing is itself necessary because it allows you to legally operate your business within a given state or local area. Without that license to operate, your business would be subject to potentially damaging fines levied by the agency having jurisdiction.
Surety vs. Fidelity Bonds
When considering how to become bonded, you'll have to determine whether you need a surety or fidelity bond, since the two have different purposes.
Surety Bonds are typically required by clients, government agencies, or licensing bodies. They act as a guarantee that your business will fulfill its contractual or legal obligations. If you fail to meet those obligations - such as not completing a project or violating licensing regulations - the party that required the bond (the obligee) can file a claim to recover losses. You, as the principal, are then responsible for reimbursing the surety company for any payouts made. Surety bonds are common in industries like construction, auto sales, and professional services where compliance and performance are critical.
Fidelity Bonds, on the other hand, are designed to protect your business itself. These bonds cover losses resulting from dishonest acts committed by your employees, such as theft, fraud, or embezzlement. They are especially valuable in businesses where employees handle cash, sensitive data, or valuable assets. Unlike surety bonds, fidelity bonds function more like insurance policies, offering internal protection rather than guaranteeing performance to an external party.
Understanding the distinction between these two types of bonds is essential for choosing the right coverage for your business. While some companies may need only one type, others - especially those in regulated industries or with high-value operations - may benefit from both.
Bonding vs. Insurance Considerations
While it is definitely an important step, and sometimes even a required action, to get insurance and bonding, it's not usually a good idea to undertake the two actions at the same time, or with the same supplier. Since not all businesses even qualify for bonding, you will first have to find out if yours is one which does qualify for bonding. Usually, a thorough background check will be run against you and the entity by a bonding company, looking for any criminal record, and checking personal references as well as those supplied by business peers.
Getting insurance for your operation is a little more straightforward and does not require the kind of checking associated with bonding. However, if you were to go to an insurance company to seek both bonding and insurance, the bonding part of that action would probably be farmed out to one of several bonding companies the insurer might work with. In effect, that would bring a third party into the process, which might well cause delays and extra costs when you're applying, and might also cause processing delays and higher charges when any claims need to be made.
What Are Surety Bonds For?
In essence, they are a promise by a guarantor company (the surety) to pay another individual or company (the obligee), an amount of money stipulated in the terms of the bond, in the event that the third party (the principal) fails to live up to the obligations specified in the contract. The purpose of a bond is to protect the obligee against possible losses incurred as a result of the principal's failure to meet the pre-specified conditions.
Bonds are often required on government contracts, as a protection for the government against inadequate performance by contractors who do not fulfill terms of the contract. In such cases, the company would be obliged to pay a certain amount (the face value of the bond), so as to rectify matters with the government agency. In turn, the company would then seek reimbursement from the principal as a penalty for defaulting on the agreement obligations. This is not only financially damaging to the contractor (principal), but can inflict serious ongoing damage to his business reputation.
Steps to Become Bonded
Getting bonded may sound daunting, but the process is straightforward if you prepare properly. Here’s a step-by-step guide:
- Determine Your Bond Requirements - Start by figuring out exactly what type of bond you need and the required bond amount. This often comes from whoever is asking you to be bonded. For example, if a state licensing board or a contract specifies a bond, note the type (e.g. $25,000 Contractor License Bond or a Performance Bond for a project worth $100,000). Also, verify any specific conditions (some bonds are only acceptable from certain approved surety companies, etc.). Understanding the bonding requirements for your industry and location is crucial. Different bonds have different prerequisites, so confirm what applies to you – whether through a state regulator, project owner, or industry association.
- Get Your Paperwork and Finances in Order - Before applying, gather the documentation you’ll need to submit with a bond application. Typically, bonding companies will ask for:
- Business information – your business license or registration details, Employer Identification Number (EIN), address, and info on owners/partners (often any owner with over a certain % stake).
- Personal and business financials – recent financial statements (income statement, balance sheet) for your business, and sometimes personal financial statements for owners. You may also need to provide credit information or authorize a credit check; a strong credit history can help you secure better bond rates. If your business is new or small, be prepared to show other evidence of stability (for instance, a business plan or list of references, if requested).
- Details for the bond form – the obligee’s name and address (the entity requiring the bond), the exact bond amount required, and any specific bond form or wording provided by that obligee (for example, a state may have its own bond form). Being thorough and organized with these documents will make the application smoother. In some cases, you might be able to complete the application online by filling in this information and uploading the files. Double-check everything for accuracy – errors or omissions can delay approval.
- Choose a Reputable Surety Bond Provider and Apply - You’ll need to apply for the bond through a licensed surety company or bond broker. It’s wise to research providers and find one experienced with the type of bond you need (some specialize in construction bonds, others in license bonds, etc.). Many insurance companies have surety bond departments, or you can use a specialized surety bonding company. Look for a provider with a good reputation and authorized to issue bonds in your state. Once you’ve selected a provider, you will submit a bond application (often a form asking for the information you gathered in step 2). The application will ask for details about your business and the bond requirement. Answer all questions honestly and completely. There is usually no obligation just to get a quote – the provider will let you know the premium (cost) before you agree to purchase the bond.
- Underwriting Review and Approval - After you apply, the surety/bond provider will evaluate your application. This process is called underwriting. The bonding company reviews your credit history, financial strength, business experience, and sometimes your background or reputation. Essentially, they are assessing the risk of bonding you – similar to how a bank assesses a loan application. If you have strong financials and good credit, this review is usually quick. If there are concerns (e.g., poor credit or a very high bond amount relative to your assets), the underwriters might ask for additional information or conditions (sometimes a cosigner or collateral for higher-risk bonds). The review can take anywhere from a few hours to a few days for common bonds, up to a couple of weeks for more complex cases. During this time, be responsive if the underwriters have questions. Assuming everything checks out, the surety will approve your bond request and offer you a rate (the premium).
- Pay the Premium and Get Your Bond - Once approved, you’ll pay the bond premium, which is typically a small percentage of the bond’s total value (often in the range of 1% to 15% of the bond amount, depending on your credit and the type of bond). For example, a $10,000 bond might cost a qualified applicant around $100 – $300 per year. After payment, the surety issues the bond certificate (or an official bond form). You’ll receive documentation proving you’re bonded – either a physical paper bond to sign and deliver to the obligee, or a digital certificate. Congratulations, you are now bonded! You can provide proof of this bond to clients or authorities as needed. Keep in mind that most bonds are annual; they remain valid for a set term (commonly one year) and then must be renewed with a new premium to stay active. Mark your calendar to renew the bond before it expires so you remain in compliance. Renewal is usually easier than the initial bonding (often just paying the next premium, though the rate could adjust if your situation changes).
Following these steps will help ensure you become bonded without unnecessary hiccups. The key is understanding what’s required for your specific situation and being prepared. Whether you're launching a new business or expanding into government contracts, securing a surety bond is a smart move. It’s fast, affordable, and builds trust with your clients from day one.
Use the form below or call us directly at 866-540-4002 to get started. Our team will walk you through the bonding process, help you choose the right bond for your business, and provide a fast, competitive quote. Don’t hesitate to ask us questions during the process; part of our job is to guide you through the application, especially if you’re a first-time applicant. We pride themselves on helping small businesses get bonded by explaining the process and requirements clearly.
