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Why Your Startup Should Care About Surety Bonds

According to the most current federal data, Michigan has over 700,000 registered small businesses. It’s evident that, even during the pandemic, the state has been a fertile ground for new entrepreneurs and ventures. And if current trends continue, many more new companies will come in the future.

Of course, as a Michigander yourself, you will need plenty of things to build a new business from the ground up. You need to think of every single step, from finances to business plans. You will likely need to explore various types of insurance, but there’s another option that might not be as obvious: surety bonds.

In this article, we will go over why exactly a small Michigan startup business owner like you needs to consider surety bonds. In addition, we will provide some of the basic information on the subject, including a brief guide on how to obtain a bond for your business.

Surety Bonds 101

Surety bonds are, at first glance, similar to regular insurance, with the key difference being that bonds protect your customers—not your business. Their purpose is to make sure that any project, including startup business daily affairs, goes off without a hitch.

In other words, a surety bond is there to maintain a good relationship between the different parties that are involved in the project.

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A surety bond is an agreement between three different individuals or companies:

  • Obligee
  • Principal
  • Surety

The obligee is the party that requires the bond. This is usually a government agency or project owner. The party that is required to fulfill all obligations stipulated in the bond is the principal.

Sureties act as mediators between obligees and principals. They are financial guarantors whose job is to protect the consumer and public interests by way of the bond.

Generally speaking, there are many different types of surety bonds. In fact, each individual business agreement will require its own unique bond. More often than not, we classify them into three distinct categories:

  • Contract bonds
  • Commercial bonds
  • Court bonds

How to Get a Surety Bond

Obtaining some Michigan surety bonds is no different from obtaining them in any other state. Of course, you will have to pay for your surety bond in advance.

Granted, you will only pay a percentage of the total sum stipulated by the bond (i.e. it’s premium), and that percentage is determined by the surety provider based on the information they have available on you and your venture.

Speaking of information, in order to acquire a surety bond, you will need to provide all the relevant data. That might include details like:

  • Your personal information
  • Relevant credit reports
  • Financial information
  • Obligee information

The company’s own underwriters will go over all the data before deciding on the premium and the amount you have to pay upfront. Once they do, you’re a few signatures away from obtaining the bond.

The process itself is relatively simple and surprisingly fast. In fact, if you manage to provide all of the data early, you can be bonded mere hours later on that same day.

The Cost of Surety Bonds

Determining the cost of a surety bond will always depend on several key factors, those being:

  • The applicant’s financial status
  • The type of the bond
  • The surety itself

Generally speaking, applicants that have a perfect credit score will pay a small percentage of the total amount of the bond. Usually, that amounts to somewhere between 1% and 3%.

However, as a startup business owner, your credit score might be less than stellar, or even non-existent.

In such cases, you may be considered a high-risk applicant, which will require a high-risk bond with pricier rates. With certain insurance companies, you might have to pay a staggering 20% of the total rate.

Furthermore, you might even be required to own sizable equity, up to as much as five times the original bond rate!

Luckily, you don’t have to depend entirely on underwriters and experts when it comes to determining the price of your surety bond. Modern bond issuing firms provide digital surety bond cost calculators.

All you have to do is pick the type of bond that works for your startup and crunch the numbers yourself. It might not fit exactly with the final rate that the underwriters will decide on, but it can provide you with a good ballpark for further planning.

Who Needs Surety Bonds?

Surety bonds are a requirement for startups in a variety of industries. In fact, they are so vital to business that many different types of clients apply for them, from the smallest of startups to the biggest corporations and even government organizations.

A brief sample list of people and entities that use surety bonds regularly includes:

  • Construction companies and contractors
  • Notaries public
  • Travel agencies
  • Auctioneers
  • Collection agencies
  • Auto dealers
  • Medical equipment providers
  • Health clubs
  • Mortgage brokers
  • Alcohol license holders

Why Surety Bonds are Important

There are several key takeaways from discussing surety bonds for small startups. A major benefit of surety bonds is their cost-effectiveness.

Compared to putting up cash to back your services, a bond can be secured by paying a relatively small premium payment, helping your business maintain liquidity.

That enables you to save your money and invest it in ventures that would help you grow your business organically and successfully.

But there is another, much more rewarding benefit of obtaining a surety bond as a startup founder. By signing an agreement and getting a bond, you signal to the other businesses and potential investors that you’re a serious, reputable entrepreneur.

It’s a sign that you care about standards and ethics when running a business. In other words, you’re ready for long-term commitments that involve smart, calculated investing.

Michigan Surety Bonds: Final Thoughts

Though this article deals with surety bonds you can acquire in Michigan, it applies to any startup business owner across the US, and even globally. Surety bonds are a wise investment, and by obtaining one, you will have financial security and coverage for future projects.

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