Have you ever seen a van drive by with the tagline “licensed and bonded?” Have you ever wondered what that meant? Licensed is clear enough, but “bonded?” The truth is, most of the general public has no idea what it means for a business to be “bonded.”
What Does Licensed and Bonded Mean?
The short answer to this question is simply that a business or contractor has a business license and surety bond.
Getting licensed often involves getting bonded, although these two terms are different.
Obtaining a business license involves meeting all of the State or Local Municipality requirements. This generally involves registering your business, completing forms, filing evidence of insurance and surety bond and any other conditions the governing body sees as necessary. Your ability to meet all of the government requirements is seen as a protection of residents in that State or Municipality.
This process of getting licensed is meant to filter out the “bad apples” who will engage in unethical business practices or who will otherwise be incompetent to complete contractual obligations. This baseline level of accountability is intended to raise the collective quality of work in a given area and to serve as a consumer protection.
Need to get licensed as a contractor? Check out our licensing tutorials:
- Alaska Contractor License
- Arizona Contractor License
- California Contractor License
- Georgia Contractor License
- Nevada Contractor License
- New Mexico Contractor License
- Oregon Contractor License
- Washington Contractor License
The simplest and easiest way of “getting bonded” is to purchase a surety bond to cover those who you enter into contractual agreements with.
Obtaining a surety bond means that consumers have some security if you should fail to keep up your end of a contract and they are left holding the bag. These folks can then file a claim against your bond and be compensated for your negligence.
The person who pays out on a surety bond claim? First, it's the surety company who issued the bond. But then, the surety company will come to you for reimbursement.
Therefore, when a business is “bonded” it means that a surety company has looked into the work history, credit history and other relevant details and has determined them to be up-to-standard to be backed financially.
Hiring a Licensed and Bonded Contractor
There are many reasons why you should only hire licensed and bonded contractors. But here's one:
Imagine you hire a “licensed and bonded” contractor to finish your basement. And then imagine that this contractor has a drinking problem, and a criminal problem, and an ex-wife problem, and eventually a bankruptcy problem. His business goes belly-up and he skips town. Meanwhile, your basement is a mess and you already paid for more than half of the job upfront. You have lost your money and the work is still not completed.
This is precisely the situation when you (if you hired a contractor who is “licensed and bonded”) can file a claim against the contractors bond. The surety company pays to have someone else come out and finish the work and then they go after the contractor for the full amount. This is how surety bonds work. Surety bonds are a “good faith” vehicle that allows people to enter into contracts with some level of security or safety net.
Bear in mind that there are 25,000 different kinds of surety bonds in the US and I have only described one. Answering the question “how to get bonded” will vary from bond to bond, but this explanation relates to what you are likely seeing most with all the “licensed and bonded” talk out there.
Should I Hire Someone That is Not Licensed and Bonded?
I wouldn’t. Should you chose to hire a contractor that is not licensed and bonded you must know that you are assuming all of the financial risk in the contract. Should that contractor walk away from the job, get sick, go bankrupt or any other number of unfortunate occurrence…you will be out financially.
Sure, you could hire a lawyer and go after them, but it’s unlikely that you will get anything more than a bill from your lawyer and a huge headache. A surety bond is a much cleaner and easier option for a consumer. So when it is in your power to hire a licensed and bonded contractor, by all means do so.
How to get Bonded
The fastest way of getting bonded is to contact a surety bond company and apply for a bond.
Most companies will allow you to apply for your bond online.
- If you are looking for a bond that protects your company from theft, you are most likely looking to get a Fidelity Bond.
- If you are looking to get bonded as a contractor, you are most likely looking to get a Contractor License Bond.
Licensed and Bonded Contractors - Why Hire