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 to do to get started. You’re looking over the taxation rules, the expected income, the type of people you’ll need to hire, etc. Somewhere along the line, you’ll likely have to consider surety bonds. But what exactly are they, you might be wondering.
Luckily for you, we’re here to help. This article will go over everything you need to know about surety bonds and how to obtain Michigan surety bonds.
Surety Bonds Explained
If you conduct business in an industry that is regulated by the government or other agency, you may be required to provide a guarantee that your customers and other public interests are financially protected in the event that you are not able to fulfil your contractual obligations. Examples of such businesses would be construction companies and a car dealerships. One of the best ways to protect your customers is to obtain a surety bond.
Surety bonds are three-party agreements that guarantee that contractual obligations are met. These parties are the Principal, the Obligee, and the Surety:
- Principal – business that is obtaining the bond
- Obligee – party requiring the bond (usually a governing agency or customer)
- Surety – a surety bond provider that acts as the mediator and financial guarantor
In the event that the principal is unable to perform the contract to terms, the surety will provide compensation to the customer. The principal, however, be required to repay the surety for any such costs.
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 three categories:
- Contract bonds (also known as construction bonds)
- Commercial bonds (also known as license and permit bonds)
- Court bonds
Contract bonds are required by business wishing to bid on public construction projects.
Commercial bonds are issued to companies licensed within specific industries to ensure that they will adhere to all of the laws and regulations.
Court bonds usually serve to cover any losses a party might sustain due to a court proceeding.
Are Surety Bonds the Same as Insurance?
People tend to think that surety bonds are just another form of insurance. There are a few key differences between insurance and surety bonds. First off, insurance directly protects the business that purchases the insurance policy. A surety bond, on the other hand, protects customer, subcontractors and public interests. Insurance companies operate on the assumption that premiums received will exceed claims paid. Surety providers provide short-term compensation, but principals must eventually pay out all claim costs.
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 short list 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.
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 surety provider that will issue a bond you require
- Gather relevant information, such as your financial history, managerial team, credit profile, etc. (usually they tell you upfront what you’ll need to provide)
- Apply for the bond you need, and receive a premium quote
- 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 your documents.
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 surety provider 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.