Owning a business means that you not only have to care about producing or providing an exceptional product or service, but that you also need to handle the actual running of said business. You have to do the hiring, manage payroll, and ensure that your company is following proper protocol according to state or local guidelines. It also means that you have to think about everyday risks and what it will cost to ensure that your business will be able to survive those worst case scenarios.
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That’s where business insurance comes in. Truly, no matter what industry you find yourself in, there really is no business type today that should operate without some kind of insurance coverage. With the threat of cyber crime on the rise, the possibility of natural disasters swarming and the age-old hazard of getting hurt on the job, business insurance can literally save the day– any broken bones withstanding.
So the need for business insurance makes sense, right? Luckily there’s a variety of companies with many coverage options to choose from, so you can find the best plan for your business. Fantastic. You’re on your way to checking this box off of your list of business owner responsibilities.
You start seeing competitors and other companies advertising that they are “licensed, bonded and insured”. Is it not enough to simply be insured? Do you need to be licensed and bonded too? And what does it even mean to be all three?
Take a breath–we’ll explain what the additional classifications mean–and when it might make sense to add those layers of coverage.
What It Means to Be Licensed, Bonded and Insured
Being licensed, bonded, and insured is more than fine print jargon. It can really be an important part of any company’s risk management strategy. Typically seen across general contracting or construction companies–where being licensed, bonded and insured may be a requirement– many companies can benefit from having this kind of coverage.
While being insured typically protects the business that is paying for the coverage, being licensed and bonded offers consumers, subcontractors and third party partners a sense of trust and security in doing business with your business.
We’ll get deeper into the meanings in just a moment, but essentially, being licensed conveys a higher level of professional aptitude to clients. It shows that you and your employees are capable of getting the job done to acceptable standards based on your local or state requirements. And being bonded helps create trust between your business and your clients because you are giving them assurances that they will be financially protected from losses they may suffer if you don’t fulfill your contractual obligations to them completely.
Now let’s take a deeper look:
What Does It Mean to Be Licensed?
An individual or a company can become licensed. Doing so can make you more marketable and desirable to work with as a collaborator or service provider. Simply put, being licensed shows that you have taken the necessary measures within your industry to conduct business in your state. Licensing can be especially popular among construction, legal and medical fields where some licensing is required–but are not limited to those areas of business.
It’s important to note that being licensed isn’t only for the client’s benefit. In some cases, if you have a business license it can help you collect damages when a client refuses to pay. Further, it can open the door to some city funding. There are cities that offer funding to new businesses, particularly start-up businesses, but to qualify for funds a business must possess a business license. Plus, being licensed can help keep business owners up-to-date on their quarterly tax payments. Cities require license holders to pay quarterly taxes on merchandise sold in order to keep the license current. And many businesses must pay federal and state taxes on a quarterly basis. So you’ll be less likely to forget those payments if your license status depends on it.
What Does It Mean to Be Bonded?
Bonding can be a bit more complicated to understand, because there are various options to choose from, and ultimately these options will be influenced by your industry and kind of business. Let’s start with the two types of bonds that are typically in play when it is said that a business is bonded:
- Fidelity bond. This bond says your business is trustworthy. This is a bond type that is generally used in the finance industry when you are handling clients’ financial and personal information.
- Surety bond. This bond relays that your business will have financial resources in case of an accident. There are two types of surety bonds: contract bonds and commercial bonds. A surety bond is a promise to be liable for the debt, default, or failure of another. According to the National Association of Surety Bond Producers, “It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).”
A Closer Look at the Three Parties:
1. The Principal – The principal is the purchaser of the bond; the company that will be providing its services to others.
2. The Obligee – The obligee is the party that requires the bond before permitting the principal to do business, usually a state or municipal institution.
3. The Surety – The surety is the insurance company that issues the bond.
A Closer Look at Commercial and Contract Bonds:
Surety bonds protect the third-party that is hiring a business from any possible losses. In the event of damages, the third party can file a claim and receive compensation from the surety, which would then have to be repaid by the principal. As mentioned earlier, there are two kinds of surety bonds:
- Commercial bonds: Also called “construction surety bonds”, are required for businesses that want to work on projects with a government or municipal entity. They protect public institutions from losses potentially suffered due to the bonded business’ inability to properly follow applicable laws, rules, or regulations.
- Contract bonds: There are four common kinds of contract bonds:
- Performance Bond – Ensures that the business will carry out their services in full, in accordance with the agreement made between them and the hiring party.
- Payment Bond – Ensures that employees, subcontractors, and suppliers are protected from non-payment or late payment.
- Bid Bond – Guarantees to the hiring party that the bidder will take on the job if selected.
- Ancillary bonds – Work in conjunction with performance bonds to ensure that all contract requirements are met, excluding performance and payment requirements.
What Does It Mean to Be Insured?
As mentioned at the top of this post, most business owners understand the value–or at least the need–of having business insurance. To be insured means that your company will be covered in the case that a risk becomes a reality. There is a wide range of protection to choose from and ultimately your coverage plan will consider your type of business, location, size of business and other factors specific to your industry and practical work needs. Take a look at some of the typical insurance costs for small businesses to get a better idea of what your business’ insurance plan should include.
Should My Business Be Licensed, Bonded and Insured?
So, being licensed, bonded and insured actually means something and can add protection and credibility beyond what a traditional insurance plan can do on its own. And because of this, companies who are licensed, bonded, and insured tend to stay in business longer than those who aren’t.
But do you really need all three? That answer will depend on a few factors including your industry, business size and number of employees, as well as your location and years in business. But you’ll also need to consider more specific items like how often your company will handle sensitive data or work with specialized equipment.
If you already know that being licensed, bonded and insured isn’t a requirement for your business, then consider talking with your insurance provider to see what they would recommend.