There’s a lot to learn when you’re starting a small business. When it comes to protecting yourself and your customers, business owners may consider two products that do this: surety bonds and liability insurance.
Let’s take a closer look at both bonds and insurance and discover how they can help protect your small business.
What is bonding insurance?
A surety bond, sometimes referred to as bonding insurance, is a guarantee to your clients and customers that your business will fulfill the terms of a contract. It is issued by a surety, a business that underwrites the bond.
If you are unable to complete agreed-upon work for a client, they can make a claim against your surety bond to be compensated for their financial losses. However, you will then be expected to reimburse the surety for paying the claim.
Who needs surety bonds?
Surety bonds are often a requirement to work in specific industries, such as:
- Auto dealerships
- Finance (including mortgage brokers, tax preparers, insurance brokers, and investment advisors)
You may be unable to obtain the professional licenses needed to work in your industry without first buying a surety bond. The minimum value of a bond is typically set by either state or local law or a professional association. A business is said to be “licensed and bonded” when it has the required licenses and surety bond to operate in its industry.
What is insurance?
Insurance is a contract between you and an insurance company that states that the insurer will provide financial protection under the terms of your policy (i.e., the contract). You pay a regular amount for this protection, known as a premium. You do not need to repay your insurer after a claim is paid.
Business owners often consider many types of insurance to protect their businesses against potential risks. Some coverages are required by law or a professional association for specific industries and occupations. Examples include:
- Contractors required to hold minimum amounts of General Liability insurance to be licensed in a state
- Errors & Omissions or Medical Malpractice insurance requirements for accountants, healthcare professionals, lawyers, and other occupations that commonly give advice
- Businesses are generally required to have Workers’ Compensation insurance in every state, except Texas, before they hire their first employee.
Other forms of coverage may not be mandatory but could help protect your business against costly claims, accidents, or damages. These include, but are not limited to:
- Business interruption
- Equipment breakdown
- Non-owned and hired auto
- Transporting equipment
Bonded vs Insured for Small Businesses
Now that you better understand surety bonds and business insurance, you may be wondering why businesses would need either product or both. There are key differences between these products that may make them essential for small business owners for different reasons.
How are surety bonds and insurance different?
Bonds are designed to protect your customers and clients; insurance is designed to protect you and your business.
Surety bonds can be used to compensate someone who makes a claim against your business, but you will need to repay the surety if this happens. It will not cover your legal expenses or other costs associated with the claim.
Insurance, on the other hand, does pay your legal costs and compensates the claimant. You can also purchase policies to cover additional events, such as workplace injuries or damage to your business property, that surety bonds do not cover. Your insurer will not ask to be repaid when they pay a claim.
Why do businesses need to be insured or bonded?
There are many reasons why businesses may need to be insured or bonded:
1. Laws and Licensing
Frequently, it is to fulfill their legal obligations. Some occupations or industries may be required by law to have a surety bond, a specific type of insurance, or both. Without a bond or insurance coverage, they may be unable to receive a license to work in their field. For example, a real estate agent may be required to have a minimum level of Errors & Omissions coverage and a surety bond to be licensed and bonded.
2. Contractual Obligations
Another reason why a business might need to be insured or bonded is to fulfill the terms of a contract. A common example of this is a commercial landlord who requires their tenants to have General Liability insurance. Your clients or other business relationships may add terms to a business contract that mandate you to purchase business insurance, a bond, or both.
3. Client Expectations
Business insurance or a surety bond may be expected by your clients and customers. These products can send important signals to people thinking about working with or hiring your business. Insurance and bonds show that you value your work and that you are prepared to protect it, as well as your customers.
4. Protecting Your Business
Finally, businesses often consider insurance and bonds to help shield their finances. Claims from employees, customers, clients, or members of the public can be expensive. They can quickly drain a business owner’s accounts—particularly when it comes to long, drawn-out lawsuits. Insurance can help remove the burden of paying legal fees, compensation, and other fees and expenses from your shoulders. Bonds can help buy you some time to sort your finances while the claimant is paid.
Do I need to be insured, bonded, or both?
You may be wondering if your business needs to be insured, bonded, or both. This will depend on many factors, such as your occupation, the industry you work in, and how your business is structured.
When weighing the option of bonded vs insured for your small business, you’ll likely want to consider the following:
- What licenses are required to work in your industry? Is insurance or a bond necessary to become licensed and bonded or legally work in your field?
- Are there any laws or requirements from a professional association that require you to have insurance or a bond?
- Do your clients or customers expect you to have insurance or a bond? What is the standard in your industry?
- Could you afford to pay a claim or lawsuit brought against your business? How would business interruptions, equipment breakdown, or other unforeseen events affect your finances?
Protecting your small business
Surety bonds and insurance are two ways that small business owners protect their business finances. Though they are similar in some ways, there are key differences to how each protects your business. Depending on your industry, you may need to be bonded and insured to work in your area.
It’s easy to find insurance coverage with BizInsure. Start comparing quotes now and help protect your small business from the unexpected.