If you’re just beginning to get started as a contractor or owner of another kind of business that relies on services it’s possible that you’re trying to figure out if you’re required to get licensed and bonded. Because bonding is a part of insurance and licensing so let’s look at the meanings of each of these terms before looking at the benefits of being secured.
Licenses: Depending on what kind of business you run you might require the right license to operate in the state you are operating in. A license means that you’ve completed the required knowledge and experience required to perform the task you’re trying to get employed to do. Examples of business professionals who require licenses are medical professionals; lawyers hairdressers, barbers, and cosmetologists accountants; contractors for home improvement as well as real estate agents, and those who handle food items or alcohol.
insurance: If a business is insuring itself, this means it is protected from financial losses resulting from incidents at work. There are a variety of kinds of insurance for businesses that protect businesses from various hazards, including the possibility of property damage as well as lawsuit payouts and lost revenue. Small-scale business owners who are just starting out need to discuss their insurance needs with a qualified insurance consultant prior to offering services to their customers.
The concept of bonding Although insurance provides protection for the business but bonding also provides protection for the customer of a company. If something happens to the business, the client could file a lawsuit against the company and the bond issued by the company will be used to cover the cost of the claim as long as it is found to be legitimate. In the simplest sense bonding is intended to shield consumers from damaging and unethical or unsound business methods.
Two Types of Bonds
There are two kinds of bonds that business owners can buy the other being surety bonds and fidelity bonds.
A fidelity bond is thought of as a complement to insurance for business because it protects the business and the customer from fraud, theft, or even fraud by employees of the business.
If an employee of a company is providing a service in the home of a client and is able to steal an item, a fidelity bond is a way to pay the cost of an employee’s conduct and the business is not directly responsible for any harm caused due to the worker. Thus, although a fidelity bond is intended to protect the client it also shields the business from unintentional conduct from employees.
A surety bond, which could also be referred to as a performance bond offers customers assurance that services will be provided in the manner agreed upon. Three parties are that are involved in the purchase of surety bonds.
- The Principal It is the principal company offering the services as well as the person who purchases the bond.
- The Obligee It is the entity that needs the bond for the principal to conduct business, typically the state or a municipal. In some cases, the obligee could be a different firm, for example, when a subcontractor works for general contractors.
- The surety is an insurance company that issues the bond.
Here’s an illustration of how bonding operates with regard to the surety bond let’s take the following scenario: A construction firm is required to purchase a bond due to the requirements of the state in which the company is operating in, or as a proof that the work they do is of a high standard it will provide to clients. The company is contracted to construct a deck for the customer. During construction of construction, the company causes damage to a portion of the siding that is on the home of the customer. The client asks the company to fix the siding however, the company is unable or won’t repair the damage. The customer is able to submit a claim to the company that guarantees surety bonds If the claim proves to be valid following an inquiry, the client is reimbursed from the bond purchased by the company. The customer will then be able to utilize the funds received from the bond to contract with another firm to repair the damages.
Reasons to Be Bonded
It is necessary to be bonded if the municipality or state requires it. Additionally, if your business often provides services in customers’ homes or on the premises of other companies it is advisable to think about getting bonded to safeguard your clients and your company’s financial stability.
While being bonded provides security for the client, however, it could also provide your company with financial security in the event of an unhappy customer. If an unhappy customer has an attempt to sue your business and demands compensation, the money needed to settle the dispute would be covered by the bond and will not affect the immediate operation of your business.
Bonding creates a sense of confidence between your business and your clients because they are assured regarding the high quality of your work and giving them the opportunity to receive financial compensation in the event of a problem.
If your company is insured this can send an indication to potential customers that you’re professional and trustworthy. You are also ethical.
If you’re not sure whether you’re required or should be bonded, talk to the attorney of your choice, or even a surety company or insurance firm, or another competent bond expert who can help you with your specific circumstance.