A business requires the confidence of its clientele to operate. The customer’s or client’s trust is arduous to get and easy to lose. A single default or an intentional act of defect can cause serious defamation, loss of goodwill, and credibility in the customer’s eye.
For discrepancy resolution, a business often adopts measures to create confidence and a feeling of assurance in the customers; that they will not have to suffer from financial losses.
Such confidence-building measures include getting bonded, having insurance, and licensing. These Bonds, insurance coverage, and licenses are the most common terms that organizations advertise. You will often hear or read about a company selling its services with the words bonded or licensed.
Let us discuss in brief detail what does bonding mean? And what is the difference between getting bonded and getting insured?
What does bonding mean? | The Definition of Getting Bonded:
What does bonding mean? To answer this question in the least words, you can say that the business or the company has purchase surety bonds.
Getting bonded means; the bonding company (the principal) has purchased surety bonds from the regulatory authority or the bond issuing organization (the obligee) to secure a specific sum of money to reimburse the “bonding company’s” customer.
When the customer of the company files claims, the bond issuing organization reimburses the amount of the damages. The bonded company has either become bankrupt or has conducted unethical business practices resulting in financial losses to the client. The issuing authority then cashes in the bond to compensate the claiming customer.
You might understand to an extent now, what does bonding mean? Let us now discuss the Surety bond itself.
What does bonding mean? | The surety bond:
As defined by Investopedia: Surety is the assurance of the liability of one party by another. A surety is an organization or person; that undertakes the responsibility of paying off the dues if the debtor defaults or cannot make the payments.
A surety bond is a written agreement between:
- The principal; The business purchasing the bond
- The obligee; The entity that has requested the bond, usually a government entity
- The surety; The underwriting company, The surety company provides a credit line if the principal cannot fulfill the obligations.
What does bonding mean? | The need of getting bonded:
The basic idea behind getting “bonded” is creating confidence in the minds of prospective customers.
As per the state or the municipal laws purchasing a surety bond is compulsory to start operating and conducting business.
The bond allows a layer of trust between the customer and the company. The customer is at peace of mind. The compensation of any damages is assured and claimable.
Business deals often involve large sums of money. Clients can ask the service provider or the vendors to purchase and submit surety bonds of a reasonable amount.
You will observe in most of the expression of interest (EOIs), organizations offering tender require service providers to submit surety bonds before the work commences.
Bonds also serve as a guarantee that your business practices are highly ethical and as per industry standards. It develops a sense of trust among the clients; that during the conduct of business, your firm will not indulge in any illegal or illicit activity.
What does bonding mean? | Who needs to get bonded?
Bonds are usually regulatory requirements for consumer protection purposes. But the industry you are involved in derives the need. Since almost every industry is in the US is regulated, bonding requirements and limits are present in the industry rules, regulations, and bylaws.
Some of the chief service sectors that require the purchase of bonds to operate legally and obtain a license and permission to conduct business are:
- Janitorial services
- Contractors and Sub-contractors
- Insurance brokerage agencies
- Janitorial and House help services
- Notary public
Organizations involved with an industry that doesn’t have any specific requirement regarding surety bonds can also purchase bonding facilities like business service bonds beneficial in financial and reputation terms. Business owners in such instances do not want and never hope to use their bond clause, but a backup plan for financial remediation is the most likely cause for such bond purchases.
What does bonding mean? | The cost of getting bonded:
Various factors influence the cost of surety bonds. Your company’s previous credit history and market reputation is the chief influencer.
The type of bond, the amount of guarantee, and the risk appetite are influential factors.
There are multiple types of surety bonds, and each type has a different method for calculating cost.
One thing is for sure that in most cases your company does not have to pay the total price as a single payment. The payment at contract signing is an industry average of 10% of the total cost.
What does bonding mean? | The difference between getting bonded and getting insured:
Surety bonds and Insurance coverage serve different purposes. Insurance plans are to protect the insured against any financial claim. The insurance policy provides coverage to the business/company or the individual who has purchased the product.
On the other hand, the bonds protect the rights of the clients or customers of the company.
Insurance companies divide the risk among the group of customers who bear similar risks. Whereas; a bond is for a particular client.
Businesses purchase insurance in anticipation to claim the instrument to protect themselves from bearing financial losses. On the other hand, you buy bonds hoping that you never have to redeem the bonds.
One more mentionable difference is the claims process. In insurance claims, the insurance company reimburses the insured or directly settles claims with the affectee. The insured does not pay any amount to the insurance company other than the insurance premium.
But for the bonds claim process, The obligee settles the claim amount if the claimant has proved financial damages. The principal then has to pay the claimed amount back to the obligee. The advantage here is the pressures of time are relieved, but the principal does have to pay the money back, which is a financial burden.
The suggestion is to consult your legal aid and independent insurance agent for better and rational guidance.