If you’re a small business owner, chances are you’ve purchased a surety bond. If you’re just getting started on the journey of small business ownership, it’s likely you’ll need to purchase a surety bond in the near future. Either way, you should know exactly what a surety bond is, why you’re buying one, and what can happen if you aren’t bonded.

First, you should understand how surety bonds work. All surety bonds are made of three parts:

1. Principal - This is you or whoever is buying the bond. You’re guaranteeing your business’s future performance.
2. Obligee - This is the entity requiring the bond, typically the government. They want to guarantee your business will follow all rules and regulations they’ve set.
3. Surety - The surety is the insurance company that backs the bond and provides the line of credit should a claim be filed and proven against the surety.

So what happens when your business isn’t bonded? A lot of the time, potential customers won’t even give you a second look. Not being bonded often indicates unreliability, especially if you’re a contractor or car dealer. Getting bonded can be a simple, pain-free process, and knowing the basics puts you miles ahead of the competition.

If you’re not bonded, you’re going to face challenges. First and foremost, you could be breaking the law. Many businesses are required by law to purchase surety bonds and often business licenses won’t be issued without proof that the would-be owner has the bond. By checking to see what your state requires, you’ll save yourself a lot of legal trouble. Then, if you fail to adhere to your industry’s laws and regulations in any way, you might end up being sued because the claimant has no surety bond to file a claim against. And again, you may already be breaking the law by not having a surety bond...it can be an ugly cycle.

You may have heard about what happened with nail salons in New York City recently. Many of the city’s over 7,000 nail salons were revealed to be severely mistreating their employees in a two-part series published in the New York Times. They are underpaid, overworked, and exposed to dangerous fumes and chemicals for hours every day. Many employees are often forced to pay fees before they even begin working with salon owners claiming such practices as means for covering training costs for inexperienced workers. In some cases, starting pay was as little as $10 a day.

If those businesses had been required to be bonded, the employees could have filed claims against the bonds and been compensated for their unpaid hours. Fortunately, new regulations are being implemented that will require nail salons to purchase wage bonds guaranteeing that employees will be paid a fair wage. New York took it a step further and made operating an unlicensed nail salon a misdemeanor, punishable by a maximum $2,500 fine and up to six months of jail time. The law was passed on June 18, 2015.

If you’re a contractor, you’re going to deal with bonds quite often. Contractor bonds, which can vary by city, ensure that contractors are adhering to all applicable ordinances and are usually required to become licensed. Then there are several types of construction bonds you might need to get throughout the project, like a maintenance bond, which guarantees against defective materials and workmanship for a certain period of time after the work is completed.

Typically contractor licenses require being bonded. A smart consumer is going to thoroughly research their contractor before signing a contract and they’ll pass over you if your license has lapsed or your bond has expired or defaulted. Contracting nightmares are a dime a dozen and horror stories have made clients much more wary of who they trust to take on something as important as a home remodel. If you’re already bonded and knowledgeable about which bonds you may need as the project continues, you’re going to stand out to potential clients as the trustworthy, reliable choice.

So how do you get bonded? Just call a surety bond provider and they’ll get you a quote. If you know what bond type you need, great! If not, the surety provider will be able to help you determine what you need, or you can take a look at this map. Click on your state to see what bonds are offered. Usually you can get a quote within one or two business days and your bond a few days after that.

It’s important that your business is operating within the law and fulfilling its licensing requirements. It’s also valuable for you, as a business owner, to know exactly why you’re purchasing a bond and why your business needs it. Customers are savvier than ever and researching businesses they patronize is easier than ever, so make it easy for them to choose you: know your licensing requirements, get bonded, and get down to business.