What business start-ups in Delaware need to know about surety bonds
No matter the industry, entrepreneurs and small business owners analyze the same key factors before launching their start-up: Business plan? Check. Insurance? Check. Over-the-top fancy water cooler? Check.
However, one important risk mitigation tool often goes by the wayside during the hectic process—surety bonds. It’s not surprising for professionals to be unaware of bonding protocol, even when the law requires them to secure a bond before they can begin work.
How Surety Bonds Work
The basic purpose of a surety bond is to provide a legal, financial guarantee that an individual or a business entity will fulfill its duties according to all applicable regulations and laws. As such, surety bonds offer financial protection for various stakeholders, including employers, project owners, and the general public.
Surety bonds are often mistaken for or confused with insurance. Unlike insurance, which is a retroactive recovery measure, surety bonds aim to prevent wrongful acts.
Essentially, a surety bond is a legal agreement between three parties:
Delaware Surety Bond Requirements
Although surety bonds are sometimes viewed as relatively obscure, they are crucial to America’s business market. Unfortunately, some individuals who intend to establish a business find out that they don’t have the financial means necessary because they were previously unaware of bonding requirements for their industry. Providing upfront collateral and paying bonding fees can be extra costs an entrepreneur might not be prepared for.
Entrepreneurs need to evaluate all aspects of their industry from the beginning to determine how their business will meet regulations and fit into the market. The following are just a few professions that typically have to meet Delaware surety bond requirements:
For example, Section 2108(a), Title 5 of the Delaware Code requires mortgage loan brokers to secure a $25,000 bond to prevent them from committing fraud or participating in other dishonest lending practices. Similarly, Section 2914(a), Title 5 of the Delaware Code requires motor vehicle sales finance companies to be bonded for $25,000 to prompt them to make ethical business decisions.
Professionals who aren’t required by law to secure surety bonds can still choose to take advantage of their benefits. For instance, accounting firms often purchase employee theft bonds. These bonds provide financial protection in case an employee should choose to steal or engage in other illegal activities.
How to get a Surety Bond
Insurance companies traditionally issue surety bonds, but with the recent increase in surety bond regulations, surety agencies that specialize in bonding are on the rise. When looking to get a bond, applicants go through a process similar to that of loan approval: bond underwriters will review the applicant’s financial history and credit profile, as well as other attributes that indicate an individual’s financial stability.
Some start-ups will have to pay higher rates to secure a bond than typical applicants do if they lack solid credit or financial history. Rates fluctuate for a number of reasons, such as the bond’s amount, the jurisdiction in which the bond is executed, and the surety provider. Entrepreneurs who need a surety bond should take the time to shop around and find the most reliable coverage for the best rate possible.
Today’s guest post on why entrepreneurs and small business owners should be aware of surety bond requirements was contributed by Danielle Rodabaugh. Danielle is a principal for SuretyBonds.com, an agency that issues surety bonds to individuals and businesses across the nation.
Surety bonds are designed to protect customers financially, ensuring that you follow through on obligations of your license. Essentially, if you fail to deliver on what a contract stipulates or violate local laws and regulations, the obligee can file against your bond, or in many cases, the consumer files directly against your bond.