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PROTECT YOUR BUSINESS

Contractors: Here's Why You Should Be Licensed, Bonded, and Insured

7-minute read

Contractor will clipboard checking security.
Allison Grinberg-Funes

Allison Grinberg-Funes

8 April 2021

Being a contractor means that it makes sense that you'd want to set yourself apart from the competition. Being licensed, bonded, and insured is one way to stand out among others competing for the same customer, but there's more to it than that.

We'll go over 5 reasons why contractors should be licensed, bonded, and insured, how to make sure your business is protected in each way, and when it makes sense to take these steps.

5 Reasons Why You Should Be Licensed, Bonded, and Insured

1. It may be required by law.

Did you know that each state has different laws and requirements when it comes to getting:

  • a contractor's license,
  • business insurance, and
  • a surety bond?

Not only does each state have different regulations for contractors, but typically there are also laws at the local level, either by county or town. And even if a state requires only one of the three, you may still find it hard to get a large project if you don’t have all three.

Let's break that down a bit more.

The majority of states require contractors to be licensed in order to run their business. (You can see what your state requires by checking our contractor's licensing hub here.) Getting a contractor's license may include proving that your business has a certain amount of insurance coverage.

Both of these things help business owners to win customers and protect their business in the event a customer makes a claim.

But what about protection for the customer?

That's where bonds come in. Surety bonds help to protect your projects and ensure they're completed correctly, helping to secure the completion of the job and the security of the customer's investment.

Many surety bond companies won't issue a bond without knowing that a contractor is also insured. If a claim were to be made on a surety bond, the company writing the bond wants to know there's insurance to protect their investment.

While a contractor's license may at times be the only legal requirement, both licensure and getting a surety bond often require having business insurance.

This kind of comprehensive protection goes both ways, and your customers can feel more secure about their choice to work with you.

2. It helps you get more customers.

We mention customers in the previous section, because of course you want to protect your business, but what would your business be without customers?

Having a contractor's license and business insurance are two indicators to potential customers that you know how to do your job properly and can protect yourself against potential mistakes.

Knowing that a contractor has the support to handle a claim if one is filed, either financially or legally, can give a customer peace of mind before moving forward and deciding to work with you.

Competition is an aspect of running a business that's often top-of-mind for good reason. Remember: not all contractors will take the steps to get licensed and insured, but those who do are more likely to build trust with their customers.

3. It reflects positively on you within your community.

Customers may play a crucial role in your decision to get licensed, bonded, or insured, but they aren't the only ones to consider. The community where you're completing a job is also important, especially when it comes to bonds.

Think of it this way: Have you ever driven through a community and seen a house halfway constructed? Or maybe you're looking at a strip of businesses, but one of them is only partially built. They are eyesores, right? They're certainly not pleasant to look at, and they're often a reminder of what could have been.

The story behind unfinished jobs is usually different, but one popular reason is that the contractor couldn't move forward because they or the customer lacked the funds to continue the project.

Getting a surety bond helps to assure a customer and their community that the project will be followed through to completion, as there's financial assistance available to the contractor to help bypass any financial roadblocks.

4. You need it to get the job.

If you work as a contractor, there's a chance that the projects you work on require a lot of materials, time, expertise, and money. Because construction projects can cost a hefty sum to complete, many customers will require contractors to have a construction bond before signing them on to a project.

And most contractors want to have a bond anyway — because without it, they will have to provide the funding upfront for the project.

Getting a construction bond means that you're able to bid on projects that otherwise may be out of your budget. Because many customers — especially those who work commercially — realize this, it's just one reason why they typically require contractors to be bonded.

The other reason? We'll cover that below.

5. It helps protect you from costly claims.

It's not easy to 100% avoid claims made against your business. Despite business owners trying their best or even believing they weren't at fault, a study found that 43% of businesses are threatened with or involved in civil lawsuits each year.

That means, even if businesses are found to be not at fault, they are still responsible for legal fees.

Legal fees can be costly and add up quickly, putting you in a financial deficit that's hard to get out of.

Having business insurance means that if a customer sues you for something that happens while you're working for them, you may be covered for some of the damage costs and legal fees.

For example, say you're helping build a new addition to a customer's home. The customer's child walks around the unfinished addition and steps on a nail you'd inadvertently dropped. The customer has to take their child to the emergency room and sues you for the cost of the medical bills.

Without insurance, you could be responsible for paying costly medical fees, as well as associated legal fees, as you hired a lawyer to defend your business.

Insurance is often required in order to get a surety bond, so that in case there's a claim made against your bond, you can rest assured you'll be protected there too.

For example, if you'd gotten a surety bond for a large construction project and somehow the materials for the project got damaged, then the surety company could help pay to replace the materials and submit a claim to the insurance company to cover the cost, meaning it wouldn't have to come out of your pocket.

Both business insurance and surety bonds are ways to protect you from having to take money that could go to other parts of your business, and spending it to cover damages.

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Here's How to Get Licensed, Bonded, and Insured

Now that you have a better understanding of the benefits of being bonded, licensed, and insured, you may be wondering what the process for getting all three looks like.

Become a licensed contractor.

Becoming a licensed contractor is a slightly different process, depending on where you work. Not only does the state you work in most likely have specific requirements, but your local government may have regulations as well.

You can find your state requirements for getting a contractor license in our contractor's license hub here. While requirements vary, here's a sampling of what may be required to get licensed:

  • An application and application fee
  • References from others in your industry who can speak on your behalf
  • An exam
  • A financial statement
  • A surety bond
  • And more

Beyond state regulations, be sure to check with your local government to see if any other permits are required for contractors.

Get a construction bond.

If you're a contractor who is working on large-scale projects, like a home remodel or a business contract, you may need to get a construction bond or a surety bond.

Depending on the size of your business, your abilities, and the size and needs of the project, there are different types of bonds available to apply for. Three common types of bids are: bid bonds, performance bonds, and payment bonds.

To get a bond, you'll need to work with a bond issuer, and it's helpful if you find one that specializes in issuing bonds for projects like the one you're planning to complete. Many bond issuing companies specialize in specific types of projects, so they can better understand the particular risks of an industry.

While the process for working with every bond issuer differs, one commonality is that many require proof of business insurance in order to approve a bond. If something were to go wrong with the job you're doing, the bond issuer wants assurance they'll be covered financially by your policy.

Before moving forward and requesting a construction bond, you may want to consider looking into insurance coverage.

Get business insurance coverage.

You may realize this, but having business insurance coverage is beneficial to you in a variety of ways, including applying for your contractor’s license and bonds for the work you do.

Like any important purchase, you may want to shop around to see which options are available for your business and that make the most sense for you.

You can use Simply Business's free quote tool to compare policies for free.

But remember, there are other steps you can take to make sure you're learning which coverage is best for you. You could:

  • Ask other contractors in your area what types of coverage they have
  • Research all applicable risks to the work you do
  • Read our no-stress guide for getting insured
  • Talk to a business counselor via your local Small Business Administration (SBA)

If you have questions and prefer to talk to someone live about your coverage options, you can speak with a Simply Business licensed insurance agent by calling 844-654-7658.

Licensed, Bonded, and Insured Means Protection for Your Business

When you're a contractor, a lot of time, commitment, and money can go into building your business, so it's understandable you'd want to do everything you can to protect it.

Learning about how to get licensed, bonded, and insured, and why it could benefit your business is a great step in the right direction.

We know that as businesses grow, there's more opportunity to learn. If you're interested in learning more about growing your small business, check out Simply U, our blog for business owners.

Allison Grinberg-Funes

Written by

Allison Grinberg-Funes

I’ve told stories since I learned to talk and written since I could hold a pen. As a small business owner myself - I'm a freelance writer and yoga teacher - I love contributing to the entrepreneurship community in different ways (including writing for Simply Business!). When I’m not drafting articles for SB, I can be found on my yoga mat, perusing an indie bookstore, and writing (with my cat nearby of course).

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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