What Does It Mean to Be a Licensed, Bonded, and Insured Business?

Depending on your field of work, before a customer agrees to do business with you, they might ask for proof that your company is licensed, bonded, and insured. However, many customers and even businesses themselves don't actually understand these terms or the differences between them. Here's a breakdown of what it means to be a licensed, bonded, and insured business and why it's important. 

What Does It Mean to Be a Licensed Business? 

Being a licensed business means your company holds the appropriate credentials from the state or a governing body to perform a specific type of work. Construction businesses are required to get licensed in most states before workers can take on building projects, etc. 

To get a license, your business typically needs to pay a fee and possibly pass an exam or two. Certain states have more licensing requirements than others for the same type of work. Businesses considered riskier to the public have the greatest chance of needing to be licensed by the state before being allowed to perform their operations.

What Types of Businesses Need to Be Licensed?

The most common example of businesses that need to be licensed is in the construction field. But there are several other professions that also often require licenses, including:

Your profession may not be on this list, but that doesn't necessarily mean it doesn't require a license. If you have any questions about whether you're required by your state to get licensed, be sure to read up on your local laws. 

What Does It Mean to Be a Bonded Business?

Being a bonded business means that you hold a surety bond, which will pay out to the customer if your company fails to meet its obligations or complete the work it was contracted for. There are several different types of bonds, including:

Surety bonds: 

These bonds protect businesses against lawsuits stemming from customer/client claims of incomplete or unsatisfactory work and also from charges stating your business didn't comply with local laws or regulations. In the case of construction business owners, a surety bond is formed between them, their customers, and the organization or individual that issues the bond, known as the surety. 

The construction business owner must pay the surety to take out the bond. However, if the construction business doesn't meet the requirements outlined in the contract with its customer, the surety will pay out a fine or fee to the customer as compensation.

License and permit bonds: 

A type of surety bond, these are usually required for municipal contracts that the contractor is licensed in and ensures that a contractor or construction business will comply with local regulations related to the building permit. If a customer hired a contractor to complete an electrical installation job in their new home, a license or permit bond, also sometimes called a contractor or construction bond, could be used to guarantee the work done. In the event the customer experienced an electrical fire because the contractor's work wasn't up to code, they could file a claim against the bond to receive compensation for any resulting property damage. The contractor would then have to reimburse the surety.

Contract bonds: 

These bonds, also known as performance bonds, assure customers that the business will fulfill its contract according to its stated terms. An example of when a contract bond would be used is if a contractor faced bankruptcy before completing a contracted job. The customer could then file a claim against the contract bond to compensate for the incomplete work.

Fidelity bonds: 

These bonds protect the policyholder from employee theft or fraud. In the case of a business owner, in the event of employee theft or criminal acts against the business, a fidelity bond could be used to compensate for resulting company losses.

Fiduciary bonds:

These bonds are used to ensure the fulfillment of court-appointed tasks. Fiduciary bonds are often used to ensure proper management or handling of a third party's assets or finances. 

An example would be if an elderly person were no longer able to manage their personal assets or property. A fiduciary bond could be used by the person the court appoints to manage these assets and property, such as a close relative, to ensure they meet their responsibilities and don't embezzle money or sell the property or assets without permission.

Court bonds:

These bonds can include supersedeas bonds, attachment bonds, appeal bonds, and injunction bonds. They're each a type of surety bond that ensures court-appointed tasks are fulfilled, similar to fiduciary bonds. 

A court can use an appeal bond to require payment from an appellant currently waiting on an appeal ruling of a judgment. The appeal bond amount would likely be the judgment amount and interest that may be held during the period in which the appeal is still being debated.

If you're unsure of which type of bond your business needs, check in with your state's local laws and regulations. An independent insurance agent may also be able to help you.

What's the Difference Between Being Bonded and Being Insured?

Being considered a bonded business is different from being insured. Bonded businesses have purchased one of the types of surety bonds, which have three components:

• The principal: The one who purchased the bond, namely the business.
• The obligee: The state or municipality that requires the bond to be purchased before the business can fulfill its contracted work.
• The surety: The insurance carrier that issued the bond to the business.

While surety bonds protect clients and customers who get work done by the business from losses related to faulty/incomplete work or other offenses like theft, insurance protects the business itself. Businesses need insurance to be guarded against numerous potential disasters. The most common types of business insurance are:

• General liability insurance: Protects a business against claims of injury or property damage to a customer or other third party.
• Commercial property insurance: Protects a business against property damage losses caused by a number of perils, including fire, fallen objects, and more. 
• Commercial auto insurance: Protects a business against collisions, lawsuits, and other issues related to company vehicles. 
• Workers' compensation: Protects a business's workers against injury, illness, or death on the job or caused by the job and protects the business from getting sued by the injured employee.

It's important for businesses to be insured to avoid potential catastrophic out-of-pocket losses from lawsuits, extensive property damage, and more. An independent insurance agent can equip your business with all the coverage it needs to be fully protected against a range of hazards. 

What Are Some of the Benefits of Being Bonded and Insured?

There are several potential benefits for small businesses that get licensed, bonded, and insured. In fact, many small business owners find that these benefits can far outweigh the cost of any insurance premiums, licenses, or bonds. Here are just a few of the most common.

Protection from Financial Losses

Being an insured, licensed, and bonded business can help protect your company from possible major financial losses. Without insurance or bonds, your business could even face potential bankruptcy in the case of just one lawsuit. 

Suppose your business didn't have proper liability protection in place when a customer sued it for improper work performed. Even one lawsuit can cost a business hundreds of thousands of dollars or more, and without enough insurance, your company could have to pay these costs out of pocket.

Provide Business Legitimacy

Securing the proper licensure, insurance, and bonds can also help assure prospective clients or customers that your business is legitimate. Bonds can help those who want to work with your business feel secure that they won't lose any money for incomplete or inadequate projects. Further, many informed customers and clients won't work with or hire businesses that can't produce proof of proper licensing, bonds, or insurance. 

Comply with Client Requirements

Having proper licensure, bonds, and insurance can help a business secure more work. Especially when working with larger clients, businesses are often requested to provide proof of this documentation before a contract is drawn up. If a business cannot even provide proof of general liability insurance at a bare minimum, it may lose a prospective client or customer's interest.

The Cost of Getting Bonded and Insured

Business insurance costs vary by the type of industry your business is in and other factors like your location. Getting bonded is no different, and the cost also varies by the type of bond purchased, how much coverage you need, and your business's industry. General liability insurance can cost an average of less than $30 monthly for small businesses. 

Bond pricing can be a bit trickier since certain bonds come with premiums to be paid, while others are paid out in percentages of the total coverage they offer. Fidelity and contract bonds often cost about 1% to 3% of the amount of coverage they offer. So, a $100,000 bond might come with a price tag of $1,000.

Surety bonds can be quite a bit more expensive, costing up to 15% of the coverage they offer. Surety bonds are paid annually as a single premium amount. Like insurance, the cost of your bond depends heavily on how much coverage your business requires.

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Does My Business Need to Be Bonded and Insured?

Regardless of whether your business is required by state law to be bonded and insured, it's still a vital option to consider. Being a licensed business can protect not only your customers but also your business itself because certain states use bonds to collect damages owed by a customer if they fail to pay you. Your business's reputation also greatly benefits from being a bonded business since clients know they can trust you.

Being insured as a business is also critical because, without the proper coverage, you could face costly lawsuits or other major losses that have the potential to cause bankruptcy. Also, businesses often can't get a loan for a mortgage without first providing proof of insurance. Having insurance also helps to increase your customer base's trust and belief in your business's operations. 

What Steps Do I Need to Take to Get Bonded, Licensed, and Insured?

Fortunately, it's a pretty simple process to get licensed, bonded, and insured as a business. Check out this list to get started.

Step 1: Research your state's licensing requirements

Before you can get licensed, you'll need to know your state's requirements. You might have to take an educational course, pass an exam, pay a fee, etc., before you can obtain your license.

Step 2: Buy a surety bond

Some states even require businesses to show proof of a surety bond before they can actually get licensed. Regardless, it's in your business's best interests to buy a surety bond for full protection.

Step 3: Buy business insurance 

Your business should be equipped with at least commercial general liability insurance and workers' comp to protect against lawsuits and employee-related disasters. But your business might also benefit from buying additional coverages like commercial auto insurance, commercial property insurance, etc.

An independent insurance agent can help recommend any other types of insurance your business might require to be fully protected. You can also look at your state's website to find licensing requirements, where to purchase surety bonds, and more.

Talk with an Independent Insurance Agent and Get the Right License Bond and Insurance

Independent insurance agents streamline the process of getting bonded and insured by shopping and comparing bonds and insurance quotes for you. They also have access to multiple insurance companies, ultimately finding you the best bonds and business insurance coverage, accessibility, and competitive pricing while working for you. And down the road, they can help you update your coverage or file claims as necessary.