Surety bonds are a popular form of risk management. A surety bond insures the debtor’s obligation to pay for goods and services and or to render services. In effect, it is collateral that the creditor can use in case the debtor defaults on their agreements or obligations. The surety bond is typically drawn from an insurance company that has agreed to assume this risk in return for a premium payment. The surety agent issues the bond collects taxes, present it to prospective clients, and monitors its performance in court coverage hearings. Here are reasons you should protect your business with a surety bond.
1. Hit the Ground Running
Before you can start operating, you need to be protected. If you took out a business loan to purchase equipment or inventory, it might not be sitting in your account, waiting for you to make payment. Before you take out a loan for any business purpose, investigate the federal and state requirements for obtaining a bond. There are also requirements for bonding your real estates, such as property taxes and insurance of that property.
2. Cash Flow
The surety bond provides payment for the creditor’s expenditures and protects their investment. A surety bond will secure the creditor if you cannot pay the debt after you have used those funds. If a lender is not secured, they will not advance money to you, which can put your business at a severe disadvantage.
3. Government Agencies
Many government agencies require bond coverage before they will grant permits or licenses to operate a business. In addition, many government agencies will not pay you until a surety bond is in place. This is particularly important for businesses that sell or purchase alcohol or tobacco.
4. Personal Liability Insurance
Some insurance policies do not cover business operations but do personal cover liability for corporate officers, directors, and employees. A surety bond protects if your employees are sued for damages to a third party. With a surety bonds insurance, a business is protected against personal liability exposure. This ensures that business owners are covered against negligence claims resulting in serious injury or death.
5. Returned Checks
It is always good to have legal recourse if a customer refuses to pay for services or goods. A surety bond can be used as a legal action in place of small claims court for non-negotiable checks and cash register shortages that result in not collecting additional income by the creditor. Troubled customers can also be sued under the Official Sales Act and therefore forced to pay restitution or damages to your company if they cancel or fail to pay orders.
6. Consumer Protection
Consumers can report businesses to the Better Business Bureau, which notifies the appropriate governmental agencies. However, when a business is bonded, this method of reporting does not do much good because the business has no assets for collection purposes. On the other hand, a surety bond protects consumers by ensuring that they are financially protected if something goes wrong with their purchase. For example, if your company sells jewelry, consumers can be compensated for a wedding ring or diamond ring bought with never-recovered cash.
Banks are hesitant to lend money to a company that does not have a surety bond. The bank can pursue collection under its bond policy if the borrower defaults. The bank will also not advance any more money after receiving word from their surety that you are in default on payments. Further, once the loan is repaid, they will ensure that you have a new bond in place before they send you your final payment check.
8. Trademark Infringement
Anyone can sell a product without registering it as a trademark; however, there is always the risk of trademark infringement. Trademark infringement occurs when someone uses the same or similar trademark, name, or service used by another business. A surety bond protects against financial liability if the company challenges your right to use its trademarked name, logo, or service in your business offerings.
- No Credit Check
Some bonds do not require credit checks and are issued without collateral. If your business does not have a credit history, it is still possible for you to protect yourself from unauthorized usage of corporate credit cards. This bond also protects you from losses due to employee dishonesty and prevents theft against cash register shortages.
A surety bond is an important consideration for any business owner. It is a financial guarantee that protects the company from any financial liabilities in case of a lawsuit or other civil action. When taking out loans or borrowing from credit unions, it’s also important to consider bonding as an option. A surety bond can be applied at any local bank, allowing you to get fast and easy loan approval.