Many kinds of businesses are required to obtain a license or permit from their state or municipality before they can begin serving customers. But many are first required to obtain a license and permit bond before the license can be granted. These are a form of commercial surety bond that provides protection for consumers and the government entity that issues the business license or permit.
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How Do They Work?
Bonding requirements typically differ from state to state and municipality to municipality, though there are some that are required by the federal government and apply regardless of location. As a rule of thumb, if a business license or permit is required, a license bond or permit bond may also be required.
What Is A License Bond?
License and permit bonds protect consumers and the government entity that issues the business license or permit. Specifically, it protects consumers and government agencies against the consequences of a company’s failure to abide by applicable laws and regulations.
There are three parties involved:
- The principal is the business seeking a license or permit
- The surety is the company backing the bond
- The obligee is the government agency requiring the bond and issuing the license or permit
The obligee requires the principal to obtain a license or permit bond of a certain amount. The principal pays a premium to the surety for a bond in that amount. The bond protects the obligee against financial loss if the principal commits a fraudulent act or employs unethical business practices after receiving a license or permit from the obligee. If the surety has to pay out on a claim, the principal is responsible for repaying the surety.
What Are The Benefits?
Here are some benefits of license and permit bonds:
- In essence, the bond transfers risk from the government to the surety company
- While the bonds do not provide protection for the principal, they are often a requirement for obtaining a license or permit to operate a business
- A business that does not obtain a bond and operates without the necessary license or permit can face criminal charges and financial penalties
- Some of these bonds allow a third party—typically a consumer—to sue the principal for loss or damages resulting from the principal’s actions.
How Much Do They Cost?
The most important factor in determining the cost of a license and permit bond is the applicant’s personal credit score. Business owners with poor credit typically pay more than those with good credit. A few types of license and permit bonds may be very difficult or impossible to obtain with bad credit.
The other factors that enter into the cost formula is the total amount of the bond.
Some license and permit bonds can be obtained immediately by simply paying a small premium—usually 1% of the total amount of the bond for an applicant with good credit. So, as an example, a $10,000 bond could cost as little as $100. Someone with a poor credit history could pay up to 15% of the total bond amount.
Some bonds, however, can only be obtained through an underwriting process. The underwriter checks the applicant’s qualifications and determines whether or not to issue a license or permit bond and how much it will cost.
Absolute Surety works with an expansive network of insurance companies to help you get the best rate. Get a free quote today.
AUTO DEALER BOND
These bonds are required in nearly every state and help ensure that auto dealerships comply with industry regulations. They protect the public from potential unethical or fraudulent actions of car dealers and their employees.
NOTARY PUBLIC BOND
A notary public bond guarantees that the notary carries out their duties ethically and in accordance with the law.
CONTRACTOR LICENSE BOND
Most states require construction contractors to purchase a contractor license bond before being granted a license to work in the state. By purchasing the bond, a contractor is agreeing to adhere to the laws and regulations governing construction work. Additional contract bonds may be required for specific construction projects.
Alcohol bonds, also known as liquor license bonds or alcohol tax bonds, guarantee compliance with laws and regulations governing business conducted under a liquor license. Bonding requirements vary from state to state but typically apply to wineries, breweries, liquor stores, restaurants, warehouses, and transporters. The primary purpose is to ensure that businesses subject to alcohol taxes pay them.
Tobacco bonds guarantee that companies that sell tobacco products pay the proper tax on tobacco sales. In some states, all tobacco products are covered under one bond, but in others, separate bonds are required for cigarettes and all other tobacco products
FREIGHT BROKER (BMC 84) BOND
The freight industry is regulated by the Federal Motor Carrier Safety Administration (FMCSA), which requires freight brokers and forwarders to post a $75,000 bond in order to obtain a license to do business. Freight broker bonds provide protection against the fraudulent or negligent acts of freight brokers, such as failing to pay shippers or motor carriers.
MORTGAGE LICENSE BOND
In some states, mortgage brokers, lenders, servicers, and loan originators must purchase a mortgage license bond before they can obtain a license to do business in the state.
Also known as pre-need funeral bonds, these bonds are required in most states to ensure that funeral homes properly manage the funds deposited in advance by consumers to pay for their funeral expenses when the time comes. Funeral bonds also protect consumers in the event that the funeral home goes out of business in the meantime.
INSURANCE BROKER BOND
Certain states require insurance professionals to obtain an insurance broker bond certifying that they will conduct their business in an ethical manner, in accordance with state and local laws and regulations, before they are granted a license.
COLLECTION AGENCY BOND
In most states, collection agencies must obtain a license or permit bond as proof of their credibility and commitment to doing business in an ethical manner according to legal requirements and industry standards.
PUBLIC ADJUSTER BOND
Many states have adopted the rules established by the National Association of Insurance Commissioners for licensing public insurance claims adjusters. In most of those states, public adjustors who perform services for policyholders rather than insurers are required to obtain a bond before being granted a license to operate in that state. Such bonds indemnify anyone who suffers damages due to the fraudulent or neglectful professional conduct of a public adjuster.
The pharmacy industry is highly regulated, and pharmacy businesses are held to high standards by government agencies and consumers alike. Most states require them to purchase a pharmacy bond as a condition for obtaining a license to do business.
PATIENT TRUST BOND
Patients who enter a nursing home or assisted living facility often have assets that are held in trust by the institution for the payment of the cost of care and other living expenses. A patient trust bond guarantees that patients’ funds are managed in accordance with legal and fiduciary standards. Many states require a patient trust bond before a facility is given a license to operate in the state.
The Centers for Medicare and Medicaid require companies that provide durable medical equipment, prosthetics, orthotics, and supplies to obtain a DMEPOS bond as a condition for being approved to bill Medicare or Medicaid for their services.
In most states, individuals who are professional auctioneers or operate an auction house must purchase an auctioneer bond to guarantee their ethical business practices, such as refraining from substituting or misrepresenting auction items. This type of license and permit bond enables consumers to seek recourse from auctioneers guilty of fraud or similar infractions.
To obtain a license to operate in the United States, Ocean Transportation Intermediaries (OTIs), must be bonded to ensure compliance with the regulations of the Federal Maritime Commission and the Ocean Shipping Reform Act. Note that there are different bonding requirements for:
- Ocean Freight Forwarders, or OFFs (typically $50,000)
- Non-Vessel Operating Common Carriers (NVOCCs) domiciled in the United States (typically $75,000), and
- Unlicensed NVOCCs not domiciled in the U.S. (typically $150,000)
Non-Vessel Operating Common Carriers (NVOCCs) participating in trade between the U.S. and China may need to purchase an optional Rider for Additional NVOCC Financial Responsibility to meet requirements established by the Chinese government, which increases the penalty amount of an NVOCC bond by $21,000.
MONEY TRANSMITTER BONDS
Wire transfer companies and online retailers who accept credit card payments must comply with rigorous laws and regulations and are required to obtain money transmitter bonds in order to transact business legally. Such bonds guarantee that the money is transmitted to the proper recipients in a timely fashion.
TRAVEL AGENCY BONDS
Travel agencies typically handle large amounts of money that must be forwarded to airlines, cruise lines, hotels, car rental agencies, and other companies that provide travel-related services. Some states require a travel agency bond as a prerequisite to granting a license to operate a travel agency.
CREDIT SERVICES ORGANIZATION (CSO) BONDS
In many states, companies that offer credit repair services to consumers must purchase a CSO bond before they can obtain a license to do business. A CSO bond guarantees that the CSO will operate ethically in compliance with state laws and industry regulations.
Get the construction bonds you need from Absolute Surety, and get on with business. We offer a comprehensive selection of the best bonds at the best prices to keep you in compliance with all your industry regulations.