Back in 2019, prognosticators saw Michigan as the next startup powerhouse. And they weren’t wrong. The very next year, the Michigan Venture Capital Association (MVCA) stated that at least 144 venture-backed startup companies operated in the state. That’s quite a number, and it shows no signs of stopping. After all, if there’s fertile ground for building a new company, why not strike while the iron is hot?
So, as a Michigander interested in starting your own business, you might be looking into everything you need for such an arduous process. You’re looking over the taxation rules, the expected income, the type of people you’ll need to hire, etc. One particular term you might be running into is ‘surety bonds.’ But what exactly are they, you might be wondering. They look like insurance, but insurance doesn’t quite work that way. Plus, there are lots of terms you don’t quite understand.
Luckily for you, we’re here to help. This article will go over everything you need to know before acquiring some Michigan surety bonds. Hopefully, you will be able to decide what type of bonds you’ll need and how to obtain them quickly.
Surety Bonds Explained
If you have a contract or an agreement with a certain party, like a construction company or a car dealership, you will want some sort of coverage should that contract fall through. By forming such an agreement with two parties, you get a document called a surety bond.
Much like any other official contract, a surety bond is legally binding. According to these documents, the party that gets a surety bond gains compensation if the other party doesn’t honor the agreement or something unexpected happens. Three parties participate in the drafting of a surety bond:
The principal is the party who actually purchases the bond. They then use the bond in order to bid on a contract or perform the work needed. Usually, the principal is some sort of a contractor.
The obligee is the party that requires the bond. Anyone, from the government to a small business, can be an obligee. They are the ones who need the assurance that the job or project in question will be completed as per contract.
Finally, there’s the surety (more often than not, it’s an insurance company). They are the ones who guarantee the bond and are also the ones who make sure the agreement is honored even if the principal cannot fulfill their duties.
As a business, you are under no legal obligation to acquire a surety bond. However, it would still be a good idea to get one, purely to have the proper coverage in case something goes wrong with your project.
Different Types of Surety Bonds
Surety bonds differ depending on the type of project or agreement they cover. Generally speaking, they fall into one of four categories:
- Contract bonds (also known as construction bonds)
- Commercial bonds (also known as license and permit bonds)
- Court bonds
- Fidelity bonds
When you want the other party to honor the stipulated contract of your project, you will require a contract bond. Normally, they last until the end of the project.
Next, there are commercial bonds, which are issued to all licensed companies to ensure that they will adhere to all of the laws and regulations when handling their business.
Court bonds usually serve to cover any losses a party might sustain due to a court proceeding.
Finally, fidelity bonds are issued to companies as protection in case their employees harm the business in any way.
Are Surety Bonds the Same as Insurance?
People tend to think that surety bonds are just another form of insurance. And considering that it’s insurance firms that issue these bonds, it’s no wonder why they might think that. However, surety bonds are not the same as insurance.
There are a few key differences between insurance and surety bonds. First off, insurance directly protects the client. A surety bond, on the other hand, protects the party with whom the client is working. Next, the insurance company is the one that covers the client’s losses in case of misconduct or damages. But a surety bond stipulates that the buyer of the bond has to provide compensation.
Finally, a surety premium is not the same as the insurance premium. The first of the two merely guarantees that a principal will fulfill their obligation fully. Insurance premiums are put in place to cover any potential loss.
Parties that Require Surety Bonds
Both small business owners and major corporations can benefit from surety bonds. In fact, nearly every industry out there can acquire these agreements. A shortlist of such businesses includes:
- Collection agencies
- Construction work contractors
- Auto dealers
- Notaries public
- Travel agencies
- Freight brokers
- Medical equipment providers
- Health clubs
- Alcohol license holders
- Insurance adjusters
Local and state authorities sometimes require certain types of businesses to obtain specific surety bonds. However, we should also add that, in general, most companies and enterprises aren’t legally obligated to acquire a surety bond in order to do business or bid on projects. Still, even if you plan to run such a business, we would definitely advise getting one, for a variety of reasons. So, keep reading to find out how to get one and the benefits of doing so.
How to Obtain a Surety Bond
In order to obtain a surety bond, you will have to follow a few simple steps:
- Figure out what type of bond your business needs
- Find the best insurance company that will issue a bond you require
- Discuss the matter with the company’s underwriters
- Provide the underwriters with relevant information, such as your financial history, managerial team, credit profile, etc. (usually they tell you upfront what you’ll need to provide)
- Once the underwriters process your info, they will offer a premium you’ll need to pay
- Pay the premium upfront
- Once you sign the relevant documents, the bond is secured
The process of acquiring a bond is incredibly quick. In fact, you might expect to get your bond as early as a few hours after providing the company with your documents.
Benefits of Having a Surety Bond
Surety bonds are a great way to cover everyone. In other words, the obligee isn’t the only party that gets compensation. The bond also protects subcontractors and suppliers, so you can hire more people to work under your project without worrying about losses.
Furthermore, once you have a bond, you can bid on other future projects. The document will open new doors for you and provide you with additional business opportunities.
Finally, with a bond at your disposal, you let your clients and customers know that you’re responsible and transparent. That’s always a plus since it will gain you additional partners and help with both revenue and future projects.
Michigan Surety Bonds: Conclusion
Most new entrepreneurs are afraid to look into surety bonds since researching them can be a bit overwhelming. However, don’t let that discourage you. Simply do your share of research, find the best insurance company willing to issue a bond, and go over everything with them. You will have a surety bond at your disposal in no time, and your project can move on swiftly and safely.