No matter the industry in which your business falls, you must ensure that you follow the applicable regulations and laws to enter into contracts, obtain a license, and operate your business. One common requirement in many different industries is that business owners must secure surety bonds before they can secure licensure or engage in business operations. In some states, surety bonds are required for a large percentage of different types of business professionals. Below, we’ll discuss some of the largest industries in which surety bonds are required.
Understanding Surety Bonds
Surety bonds are legally binding agreements between the following three parties:
• Principal – The party required to secure a surety bond
• Obligee – The party requiring the principal to get a surety bond
• Surety – The company issuing the surety bond that guarantees the principal will comply with its legal requirements and fulfill its contractual obligations
Surety bonds are not insurance and do not protect the principal from liability. Instead, they function to protect consumers. When a principal fails to meet its obligations or to comply with its legal requirements, claims can be filed against the surety. However, the principal will be responsible for paying the claims. If the principal does not, the surety will step in to pay, but it can go after the principal to recover the costs of the defaulted claims through the collateral the principal has put up to secure the surety bond or by using other means.
Surety bonds are required in many industries before individuals and businesses can obtain licensure and start operating. If a principal has too many claims or fails to pay claims filed against its surety, the principal can lose its license and be forced to stop operating the business. Here are some of the major industries in which surety bonds are required.
Auto Dealer Bonds
Auto dealers are required to get surety bonds before they can obtain licenses to deal in vehicles. Most states require auto dealers to get licensed when they sell three or more vehicles per year, and all states that require auto dealer licenses also require surety bonds before a license will be issued.
Some of the types of dealers that are required to get auto dealer bonds include the following:
• Dealerships
• Independent dealers
• Boat, car, RV, yacht, and manufactured housing dealers
• Salvage vehicle dealers
• Auto auction dealers
Auto dealer bonds are guarantees that the dealers will comply with the laws, avoid fraudulent conduct, and avoid engaging in unethical activities.
Construction License and Permit Bonds
Construction license and permit bonds are required for many professionals working within the construction industry and might be required on a project-by-project basis. Some of the types of construction professionals that might be required to get surety bonds for licensure include the following:
• Electricians
• Plumbers
• Building contractors
• Engineering contractors
• General contractors
• Roofing contractors
• HVAC professionals
• Commercial contractors
• Specialty contractors
Construction license and permit bonds guarantee that construction professionals will comply with all applicable laws, obtain the permits needed for a project, and will honor their contractual obligations. Contractors bidding on public construction projects will generally need to secure surety bonds before they can bid.
Freight and Transportation Bonds
Freight brokers are required to secure freight broker bonds before they can obtain operating authority from the Federal Motor Carrier Safety Administration. Surety bonds for freight brokers are known as BMC-84 bonds. These bonds guarantee that the freight brokers will comply with all state and federal regulations and laws governing the transportation industry when they schedule deliveries with carriers from shippers and that the freight broker holding the freight broker bond will pay the carrier as promised.
The freight broker bond cost will vary, depending on the broker’s experience, credit score, and history with surety bond claims. It will also depend on the maximum bond amount as determined by the surety company during the underwriting process. You will need to have working capital, a good credit score, and a relatively unblemished business record to secure a surety bond at a good price. You will be required to pay a percentage of the maximum bond amount upfront for your freight broker bond.
Mortgage, Insurance, Finance, and Tax Bonds
Companies operating within the mortgage, insurance, finance, or tax industries will likely be required to secure surety bonds. These types of bonds are meant to protect consumers and guarantee that the professionals on whom they rely will follow the law and the ethical standards that apply to their respective industries.
Some of the types of companies and professionals that might be required to carry surety bonds include the following:
• Mortgage brokers
• Mortgage originators
• Mortgage servicers
• Debt collection companies
• Financial and investment advisors
• Broker-dealers
• Real estate appraisers
• Tax preparers
• Legal document preparers
• Insurance brokers and agents
• Title insurance agencies
Surety bonds for professionals and companies operating in the insurance, finance, mortgage, and tax sectors are meant to protect consumers and operate as guarantees that the holders will not engage in illegal or unethical conduct and will uphold the fiduciary duties that they owe. When a professional violates the duties it owes, a consumer can file a claim with the surety.
Regardless of your business’s industry, you must ensure that you always comply with your legal requirements. In many states, you might not be able to secure the license you need without first purchasing a surety bond. You can check with your state to determine its license and surety requirements.
Once you secure a surety bond, it is critical for you to try to avoid claims against your surety. If too many claims are filed against your surety, or you fail to pay claims that are filed, your surety company can cancel your bond. You might then have trouble finding another surety company that is willing to issue a bond to you. For many businesses, the inability to secure surety bonds will mean that they will lose their licenses and be forced to cease operating.