Business Tips

What It Means to Be Licensed, Bonded and Insured In Business

Customers are often told to seek out service-oriented businesses that bill themselves as “licensed, bonded and insured.” But what do these terms mean?

Read on to learn how these credentials might benefit your business.

What is a licensed business?

A licensed business is one whose owner has obtained a specialized trade license above and beyond a general business license. Usually, getting a specialized license involves completing a certain amount of coursework and passing an exam to demonstrate your learnings.

Depending on the services and the state in which your business offers them, you may or may not need to obtain a specialized license to legally perform the work in your state. For example, most states do not require a specialized license for house cleaners. Although, general contractors and subcontractors – such as electrical or plumbing professionals – have to get a valid specialized license.

That said, the lack of a requirement for a license doesn’t mean you shouldn’t still get licensed.

If you’re in a business niche with a reputable licensing program, consider obtaining a license. A respected license could assure clients of your competence and set yourself apart from the competition.

What is a bonded business?

A bonded business is one that has purchased a surety bond. A surety bond protects consumers against improper conduct by the business. It gives them a means of financially recovering their losses through a bond fund in the event of incomplete work, damage, theft or other failures on your part. A surety bond is an agreement between three parties:

  • A principal (i.e., the business that buys the bond)
  • A surety company that backs the bond with a line-of-credit
  • An obligee that requires the purchase of the bond (i.e., the customer who may need to recover his losses through the bond)

Let’s say that you run a bonded painting company, and your customer files a claim against your business for a damaged painting in her home. If the claim is valid, but you cannot pay it, the surety bond will reimburse the customer. The reimbursement covers the loss in an amount up to the full value of the bond. But you as the business will owe the money back to the surety bond company.

In some cases, a security bond is a requirement if working with the government or other clients.

For businesses that carry a risk, getting bonded reassures your customers you will not default on your obligations. And getting a security bond is easy. Nowadays, companies simplify the process of applying for and buying a surety bond over the internet.

What is an insured business?

An insured business is one that has obtained a business insurance policy from an insurance company that will cover him for losses such as on-the-job injuries. Unlike a surety bond, a business insurance policy protects the policyholder rather than the customer. Essentially, it is an agreement between only two parties: the insured and the insurance company.

For example, an insured window cleaner who takes a nasty spill at a client’s home would file a claim with his insurance company rather than the homeowner’s insurance company. In these types of scenarios, having business insurance can give your clients the comfort of knowing that their home insurance premiums won’t go up on your behalf. There’s no shortage of types – or providers – of business insurance, and applying for insurance is straightforward.

What is a licensed, bonded and insured business?

Combining all the three terms, a licensed, bonded and insured business means it has obtained a valid trade license from the state, a surety bond, and a business insurance policy.

Seeing this trifecta of credentials on your business cards can raise a customer’s confidence. It shows that you have both the skills and the financial protections in place to get the job done with relatively low risk to them. So if you have the budget, the desire and the ability to obtain all three credentials, it’s a badge your business can wear proudly.

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Business Insights and Ideas does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation..