When I was contracting, surety bonds felt like nothing but red tape. They felt like an extra hoop to jump through to cut down on bid volume — a vetting process that just weeded out the contractors who didn’t want to play along.
I was one of them.
But, as I started advising small contractors years later, I began looking at surety bonds in a different light. They’re not just an extra step or empty paperwork. They give the contractor credibility and expand the types of projects contractors can bid on, helping them stay busy and profitable. I now look at surety bonds completely differently, and you should too.
What Are Surety Bonds and How Do They Work?
At their core, surety bonds are a three-party agreement designed to build trust between the principal, the obligee, and the surety company. Here’s the who’s who of surety bonds:
- The principal. This is the contractor’s business, which is the party responsible for completing the work, paying subcontractors, or otherwise fulfilling a contract.
- The obligee. This is the client or organization requiring the principal to secure a bond, such as a city government or general contractor.
- The surety. This is the company that issues the bond, which guarantees it will back the contractor’s performance to the obligee.
As the principal, if your business fails to meet specific obligations covered by the bond, the surety steps in to compensate the obligee. But you’re not getting away with anything. After the surety fulfills your obligations, it seeks reimbursement from you.
That’s the main difference between a bond and insurance: a surety bond protects your client, not your business. But in return, it gives you access to bigger jobs, greater legitimacy, and a layer of professionalism that clients notice.
Types of Surety Bonds for Small Businesses
There are several types of surety bonds that guarantee performance across various responsibilities or obligations, and individual industries may use different types of surety bonds. Here are the ones most relevant to contractors, trades, and service professionals:
- License and permit bonds: Some states require electricians, plumbers, or general contractors to carry these bonds before issuing their business license. They show regulators that your business follows local laws, codes, and ethical standards.
- Bid bonds: These are popular bonds used in the construction industry. They’re used to guarantee that if your bid is accepted, you’ll follow through with a contract at the bid price.
- Performance bonds: These bonds are designed to ensure that a project will be completed according to the agreed terms outlined in the contract. Government agencies often require these before work begins.
- Payment bonds: Payment bonds protect subcontractors and suppliers by guaranteeing they’ll be paid for their work and materials. They also protect the client by ensuring contractors can’t file liens on the property.
- Janitorial or service bonds: Designed for service-based companies like housekeeping or janitorial services, these protect clients from potential employee theft or dishonesty while on-site.
To clients, these bonds mean you’ll follow through on your responsibilities, whether it’s contract performance, subcontractor payments, or protecting their property from theft or other issues. They help paint your business in a dependable and financially responsible light — two traits that can make or break your reputation in competitive industries.
Industries That Need Surety Bonds
Surety bonds, in all their different forms, are essential across a wide range of industries. However, let’s zero in on three in particular:
1. Construction and remodeling
Bid bonds, performance bonds, and payment bonds are integral to construction, and contractors often need several types of construction bonds at once. For example, when a general contractor bids on a public project, they may need a bid bond up front, followed by performance and payment bonds once they’re awarded the contract (which the client should specify up front).
Private clients are also increasingly requiring bonds to minimize financial risk and liability. Performance bonds back the contractor’s word that they’ll get the job done according to the contract, while payment bonds ensure subs and suppliers don’t have to file a lien to get paid for their work.
2. Skilled trades
Electricians, plumbers, HVAC specialists, and other trades often need license or permit bonds before they can legally operate in their states. Some localities won’t issue (or even renew) a trade license without one. These bonds guarantee compliance with building codes and safety regulations, which reassures both regulators and homeowners.
Keep in mind that if the skilled tradesperson is contracting, they may also need bid bonds, performance bonds, and other bond types to secure contracts.
3. Janitorial and housekeeping services
When you’re working inside offices or private homes, clients want to know their property is protected. For cleaning companies, a janitorial bond can be the difference between landing a lucrative client or losing out to a bonded competitor. A service bond shows your company takes accountability seriously and puts customers at ease, potentially leading to better long-term repeat business.
Benefits of Surety Bonds for Your Business
Surety bonds aren’t just about meeting legal or contractual requirements. They also actively help your business grow.
As a bonded company, you will gain credibility with potential clients. You’re typically seen as being more reliable and professional, even though many clients might not even understand what a bond is. You’ll often be able to secure larger, more profitable projects, which you’re hopefully able to roll into long-term partnerships.
I’ve watched small contractors not only increase their annual revenue but also keep their backlog full by shifting to contracts with government agencies and municipalities. Without bonds, they wouldn’t even have access to submit bids on those projects.
Bonds are also a sign of financial discipline. Because sureties evaluate your credit, business history, and financial strength before issuance, carrying a bond shows you can be trusted with high-value work.
How to Obtain the Right Surety Bond
In most cases, getting a surety bond is straightforward. You start by figuring out which type of bond your client, government agency, or licensing board requires. Then, apply for a bond through a licensed surety bond provider. The surety will require some details, such as your business’s finances, credit history, and the project requirements.
Bond premiums (the cost of the bond) are usually a small fraction of the total bonded amount. For example, a $100,000 bond may cost between $500 and $4,000, depending on several factors, such as your track record and credit profile.
Some surety bonds also have sliding scales known as “blended rates.” For example, for a $500,000 bond, the surety might charge 3% on the first $200,000, 2% on the next $200,000, and then 1% on the final $100,000, leading to a total blended rate of roughly 2.2% and a total annual premium of $11,000.
When shopping for a surety bond, you should prioritize finding reputable surety providers who specialize in small business needs and can help you navigate renewal requirements, blended rates, or multi-bond discounts.
Make Surety Bonds Part of Your Business Plan
Surety bonds for small business owners aren’t just formalities or hoops to jump through. They’re also powerful tools for growth and credibility. Whether you’re a general contractor, electrician, or janitorial service owner, the right bond can build confidence with clients and open doors to new opportunities.