5 Things You Didn’t Know About Surety Bonds For Businesses

When you purchase a surety bond you are confirming that in the event of a shoddy or failed project the obligee or client requiring the bond can get coverage for the re-work. It also guarantees your bid from your end. If your small business has a contract for window repair on a government building and the price of labor suddenly goes up, your bond means you can’t back out of the project.

Surety Bonds Can Be Tied To Your License

In many cases, you may be required to purchase a surety bond just to get the right license to bid on government jobs. Once you have it, your bidding and contacting options will open up. The cost of your bond will flex; this is not an insurance policy that holds steady each month. The more you are poised to make from a contract, the higher the surety bond will need to be. Because your fees will likely be a percentage of the total bid, the cost will flex.

Construction companies pay the highest rate on surety bonds. If you are a small business owner just starting out, you may be able to get a reduced rate on smaller projects. Each time you put in a new bid, you will need to notify the holder of your surety bonds to confirm that your quote and the following contract will be covered.

The SBA Can Help

If you are applying for funding with the Small Business Association, you can get a discounted rate on your surety bonds. As you expand your business, be aware that you will need a separate MCS 82 surety bond for each state. Expansion and growth are wonderful, but your licensure may need to be updated or re-purchased at the border.

When sending your employees and contractors out of state, carefully review any requirements or restrictions you will face when hiring employees in those new states. For example, if you are working on a government building in Missouri and your business is based in Kansas, you may choose to bring in laborers from the region and only have your most skilled workers travel. You may need to review your worker’s compensation coverage. Your payroll and HR team may also need to update software to fully support these new workers.

Surety Bonds Protect the Public

In addition to protecting the person or entity hiring you to do the work, you will need a surety bond to protect the public. If you are hired to update sidewalks in a busy metropolitan center, you will need sidewalk bonds to cover your right to block or alter the flow of traffic.

This bond may be in addition to other construction bonds you currently hold. Before you bid, make sure you are fully covered to protect both your business cash flow and the stability of your bond. Relying too heavily on the coverage of these bonds can drive rates extremely high and if you lose your bond altogether, you can’t have your bids considered at all.

Your Personal Credit May Be Considered

Your personal credit may be considered with your application if you’re a small business owner. For those just starting out, it is a good idea to keep as much debt as possible tied to the business rather than to your personal credit. If you’re considering purchasing equipment to increase the projects you can bid on, get the surety bond in place first.

Because your personal credit rating can have a big impact on the projects you can bid on to grow your business, now is the time to clear away as much debt as possible. Order a full copy of your credit report and review anything outstanding. Mistakes happen; if you co-signed for a loan that has been paid off, it may still show up on your credit report because a social security number was transposed. Now is the time to do the legwork to get such debts off your record.

Avoid closing accounts if you have paid off the debt to increase your visible access to money. You don’t have to use the cards or the store account; just leave it paid off and stash the card so you can keep your score high.

The Cost Is Flexible

Surety bonds for small projects can be minimal; if the SBA guarantees it, you may pay less than 1% of the total bid to cover the risk to the purchasing entity. The larger a bid you make, the larger the surety bond you will need. Functionally, this bond is insurance. While your relationship with your bank may bring you to a place where a simple phone call can start up a loan to make a large business investment, your surety bonds will always be tied to the size of the project bid and eventual contract.

If you primarily work in just one state, getting a surety bond agency for that region alone may be sufficient. However, if you are planning to expand or if your work is specialized enough that you and your employees will be bidding and working all over the country, a basic surety bond in each state may be the best option. If your current surety bond is through the SBA, be prepared to update your application for the best rates at their discounted price.

There are also many states that are working hard to be small business-friendly. If you’re just considering expanding for a particular project or if a satellite office is in your plans, a careful review of licensing requirements and surety bond support could reduce your costs as you start bidding on new projects in that area.

Surety bonds protect the public, the purchaser, and the contractor. Like any insurance investment, your rates can be impacted by a low credit score and by the number of times the policy is tapped. While your work history may be excellent, the requirement for a surety bond is another step you have to take to bid on some projects.