Businessowners just starting out may be surprised at how many requirements they must meet in order to operate legally. From permits and licenses to insurance and bonds, businesses have to meet strict requirements before even thinking about opening their doors.

Some businessowners anticipate the need for insurance, but many don’t realize the need to be bonded, as well. Both are necessary to protect the business as it operates.

Bonds vs. Insurance

The key difference between bonds and insurance is that while insurance is a one-way contract (wherein the business pays an insurance agency for coverage), a surety bond is a three-way contract between the business, the surety and another entity.

Most bonds a business enters are bonds with the state in which they operate. By purchasing a surety bond, the business promises the state that they will operate under a certain set of guidelines. If they fail to do so, the surety promises to pay the state compensation, which they may seek reparations for from the business. These bonds are often used to <protect your reputation> as a business.

Surety bonds are not a replacement for insurance or vice versa. Both serve different purposes and are equally important.

Common Business Surety Bonds

Common commercial surety bonds include:

Contractor Bonds

Contractors are perhaps the professionals who use bonds the most. There are several different types of contractor bonds, such as:

• Bid Bonds refer to guarantee that a contractor will complete a project for a client as agreed on by a project won at a bid.

• Performance Bonds promise that a contractor will complete a project satisfactorily, and if they don’t, that the surety will replace them for the client to complete the job.

• Payment Bonds guarantees that a contractor’s subcontractors and suppliers will be paid.

• Roofing Contractor Bonds cover clients if roofing contractors make mistakes, don’t complete work or commit illegal activity related to the job.

Alcohol Bond

Alcohol bonds are often used by restaurants and alcohol sellers. The most common bonds related to alcohol include:

• Liquor Tax Bonds are required by the state and assures a business owner will pay taxes to the state related to the liquor being sold.

• Alcoholic Performance Bonds guarantee that businesses selling alcohol will do so ethically while following applicable state laws.

• Mixed Beverage Bonds are required by Texas law and determine that the business will pay all taxes, interests and costs required by the Texas Tax Code while selling alcohol.

Vehicle-Related Bonds

Many businesses use or sell vehicles as part of their business. These bonds are often used by businesses.

• Over Axle or Overweight Bonds permit carriers to operate even if they exceed the weight tolerance of the state.

• Motor Vehicle Dealer Bonds protect consumers from car dealers who may commit fraud or misrepresentation.

• Auto Wrecker Bonds are needed to meet a state license for auto wreckers or dismantlers.

• Freight Broker Bonds allow freight brokers to obtain or renew their license.

Keep in mind that bond and permit requirements vary per state. Many of these requirements are specific to Texas and may not be required in another state, so check with your location to see what type of bond your business may need.

Are Surety Bonds More Expensive Than Insurance Policies?

The average cost of a surety bond depends greatly on the type of bond and, in case of contract bonds, the size of a project. A surety often calculated how much a business will pay for their bond depending on the business’ credit. Businesses with poor credit will likely pay more for an insurance bond. If a project must have a surety bond of $20,000 and the surety quotes you for 1%, you must pay $200.

Unlike an insurance policy, surety bonds are generally one time payments whereas insurance policies are paid on yearly or monthly basis in return for coverage. This also means that once a single surety bond is completed, you may need to purchase another for the next project.

Surety Bond Requirements vs Insurance Requirements

Both surety bonds and insurance policies can be required by the state. Some insurance policies are required by lenders while many surety bonds are required by clients. For example, lenders will generally require business owners to carry property and liability insurance for the building they purchase for the business.

Some of these requirements overlap and a few businesses may require both insurance and a surety bond in able to operate.