How do commercial bonds work?

A bond is an agreement between three entities:

  • Person requesting the bond – ie: state, government (the obligee)
  • A client (the obligor)
  • An insurance company (the surety)

A bond is more similar to a line of credit than an insurance policy. If the terms of the bond are broken (for example, an employee steals from a client), the surety company reimburses the client, and your business must then pay that amount back.

Why do small businesses need bonds?

Small business owners most often need bonds in order to conduct business legally or sign a client contract. They also help attract clients to your business.

Some professionals need a bond in order to get a license and conduct business. Professions that require bonds for a license include plumbers, electricians, real estate agents, general contractors, and notaries public. The laws in your state will specify the type of bond and amount needed.

Your clients might require you to buy a bond. This is often the case for cleaning businesses and IT businesses. Clients may require your business to buy a bond before they’ll allow your employees onto their property or trust them to handle sensitive data.

Finally, bonds help you attract new clients. Bonds show your business is responsible and give clients peace of mind that they’ll be covered in a loss. Larger clients in particular will be more likely to seek out bonded companies, so bonds can give your company an edge over the competition.