What to Know About Surety Bonds as an Entrepreneur
Many different types of businesses are required to be bonded before a license or permit will be issued to them. However, you might not understand what a surety bond is. It is already difficult for most Colorado entrepreneurs to figure out how to start new businesses. Adding in a bond requirement might make the process seem more complicated.
Starting a new business requires you to consider its legal entity structure, file articles of incorporation with the secretary of state, build a website, obtain appropriate licenses and permits, and determine how to attract your customer base. While a surety bond might seem like just one more task to take care of, a bonding requirement means that you must purchase a surety bond to ensure you are legally allowed to operate within the state. If you fail to purchase a required bond, it could destroy your business. Here is what you should know as a Colorado entrepreneur who is preparing to open a startup company.
Understanding Surety Bonds
A surety bond is a form of credit provided by a bond company to the party required to purchase it. Surety bonds are legal agreements involving the following parties:
• Principal – Entrepreneur required to purchase a bond
• Obligee – Party that issues the bond requirement, which is generally a local or state government agency
• Surety – Bond company guaranteeing the principal will comply with the law by issuing the bond
Surety bonds do not protect you and instead protect the government and your customers against misconduct or law violations you might commit. If you breach your bond conditions or break the law, a claim can be filed against your bond by the state or any consumers you have harmed. The surety company will pay valid claims that are filed against your bond. However, you are not protected against liability by your bond and will have to reimburse the surety company for any claims it pays on your behalf.
When you are approved for a Colorado surety bond, you will have to sign an indemnity agreement with the bond company that legally obligates you to repay the company for any claims that are filed against your bond. If you don’t pay your filed claims, the company can pursue damages against you in a lawsuit.
Which Businesses Are Required to Purchase Surety Bonds in Colorado?
Many different businesses are legally required to be bonded. You should check the requirements for your industry to determine your bonding and licensing requirements. Some common examples of businesses that must secure surety bonds include the following types:
• Auto dealers
• Car dealerships
• Notaries public
• Travel agencies
• Health clubs
• Medical equipment providers that contract with Medicaid or Medicare
• Construction contractors
• Mortgage brokers
• Freight brokers
Other businesses might also have bonding requirements. Check with your municipality and the state to learn about any requirements that might apply to your business.
How to Get a Surety Bond
If you’ve determined that you need to purchase a surety bond, the process is fairly straightforward. You can apply for a bond through a surety company. The surety might require you to submit some additional documents so that it can evaluate the risk it would take on by agreeing to bond you. Gather the following documents to make the process smoother:
• Resumes for you and any partners
• Articles of incorporation
• Organizational structure
• Profit and loss statements
• Business and personal bank account statements
• Letters of reference from parties with which you’ve conducted business
• Bank reference letter
Once you submit your application and supporting documents, the bond company will send the materials to the underwriters. They will evaluate you and your business to make a risk determination. Some of the types of underwriting factors that surety companies consider when making bonding decisions include the following:
• Personal and business credit scores
• Business experience
• Personal and business assets
• Available working capital
• Reputation and moral character
Surety companies want to make sure that you pose a low degree of risk. For that reason, having a good credit score, strong business experience, and a good reputation can help you obtain a surety bond at the lowest cost. By contrast, if you have bad credit or a problematic history, your bond application could be denied, or you might have to pay more to secure your bond.
If the surety company decides to approve your bond application, it will provide you with a free quote for the bond premium. This is the percentage of the required bond amount that you will have to pay up front for your bond. The premium will vary based on your credit score and other factors from as little as 1% up to as much as 15%. For example, if you are required to purchase a $10,000 surety bond and have excellent credit, you might only have to pay $100 to purchase your bond. By contrast, purchasing a $10,000 surety bond with poor credit and a problematic history might require you to pay as much as $1,500 up front.
Once you purchase a surety bond, the surety company will send a bond form to the government agency requiring you to be bonded for licensing purposes to demonstrate you have complied with the law.
What to Do After You Purchase a Surety Bond
It’s important to note that surety bonds are not permanent and expire every year or two years, depending on your type of license and bond. You will need to pay attention to the expiration date and take steps to renew your bond on time to avoid the suspension of your business license.
You should also take steps to build your credit and increase your credit score. Doing so can help you receive better rates when it’s time to renew your bond. Make sure to always conduct your business according to the state and local laws so that you can avoid claims against your bond. This can also help you create a great business reputation and increase your likelihood of succeeding with your new startup company.
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What every entrepreneur needs to know about surety bonds for their business
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