Many contractors are required by the states they live in to obtain surety bonds in order to become licensed. A surety bond is a contract between a principal (the contractor), an obligee (the entity requiring the bond), and a surety (the company that underwrites the bond).
A surety bond's primary purpose is to safeguard against unfinished or unethical work to make clients feel more at ease. While the process of obtaining a surety bond as a contractor may feel cumbersome, it is an essential step to becoming licensed — and the benefits go beyond consumer protection.
Surety bonds also carry financial benefits for the contractors who are required to obtain them. In this post, we will outline the economic benefits of being bonded from the perspectives of both the contractors who purchase bonds and the customers who use the services of bonded contractors.
The Financial Benefits of Being Bonded for Customers
The upsides for customers who hire bonded and licensed contractors are clear. If a customer is unhappy with the job done by a contractor, or if the job is left unfinished, the customer can file a claim against the company's bond and receive financial compensation. Being bonded is unlike insurance policies in that a bond's coverage applies to consumers instead of the contractor themselves.
If a claim is filed, addressing that claim regarding a bond is much more efficient than handling an insurance claim, meaning less time and money invested for the customer. Once a claim is found to be justified, the surety company is the party that compensates the customer, so the customer does not have to deal directly with the contractor during repayment.
The Financial Benefits of Being Bonded for Contractors
In the long term, being bonded and licensed will help grow your business. When customers understand the safety net that your bond provides, they will trust your business more, gaining you more clients and offsetting the costs of obtaining your bond.
Being transparent and making sure your customers feel protected are great ways to build confidence in your business. For more information on how to turn your surety bond into a marketing tool and promote your bonded status to gain more customers, visit Contractor Training Center's post on Marketing Your Business as Bonded.
While bond amounts may seem daunting, it is important to remember that you can purchase a bond for just a fraction of the coverage amount. For example, a contractor who needs a $25,000 bond may pay a premium as low as $250, while competing contractors who opt for a cash payment instead of a bond will have to pay the entire $25,000. Getting bonded keeps more money with contractors so they can continue expanding their business until, or if, a claim is made and paid out.
If a claim is justified and the surety company repays a customer, the contractor pays the surety company back afterward; no line of credit is needed from a bank. This also means that being bonded does not impact a contractor's ability to obtain future loans or lines of credit.
The Financial Costs of Not Being Bonded
Just as there are financial benefits to being bonded, there are financial consequences for working without the necessary surety bond. As we've already noted, customers will respond to a bonded and licensed business's willingness to abide by fair business practices and regulations. Suppose you choose to work without furnishing the required surety bond. In that case, you are breaking the law, as well as damaging your public image and denying potential customers the safety and protection a bond provides.
You should also consider the recourse customers would have if they were dissatisfied with a contractor's work without a bond. Not only would a client pursuing legal action or filing a complaint with the state's licensing board result in financial ramifications for an unlicensed contractor who performed shoddy work, but it would also be incredibly harmful to the contractor's long-term business.
Obtaining a surety bond typically only costs a few hundred dollars, but the financial consequences of operating without one can be much higher. Save yourself time, money, and headaches by furnishing a bond and completing the licensing process before doing business.
The Bottom Line
Getting licensed and bonded pays off in many ways. If you're a contractor in need of a bond, call 1 (800) 308-4358 to talk to a SuretyBonds.com surety expert or get a free, no-obligation quote. As the No. 1 Online Surety Bond Agency in the Nation, we would love to help you do more of what you do best: build the future.
Brad Bullerdieck is the chief production officer at SuretyBonds. the No. 1 online surety bond agency in the nation. With more than a decade of experience as a licensed surety agent and high-volume sales producer, Bullerdieck prioritizes the customer experience. He's worked with the SuretyBonds.com team to streamline the bonding process and help thousands of professionals get bonded.