Licensed, Bonded, and Insured: Why It Really Matters

Small businesses need ways to help protect themselves from unexpected financial loss. It’s a fundamental truth to merely doing business. Being licensed, bonded, and insured can play a vital role in your company’s risk management strategy — but what does that honestly mean? In this post, we take a look at these three statuses to help you understand the best ways to safeguard your business.

What Does It Mean to Be Licensed?

Although the term “licensed, bonded, and insured” is tossed around a lot in the professional world, let’s start with the first and most straightforward one. Licensed means that an individual has passed the minimum requirements to do business in that particular state (and in that specific profession). 

For example, think about electricians or even hairdressers. While these are vastly different professions, each one calls for hours of training to deal with live electricity or complicated chemicals, respectively. That said, most clients consider it risky to hire a non-licensed individual to do such crucial work, such as rewiring a home using conduit. 

Of course, most of us have had a bad haircut, for instance, so being licensed isn’t indicative of expertise. However, the more technical and complicated the profession, the more stringent the licensing requirements. 

What Does It Mean to Be Bonded?

To be bonded is slightly more complicated than being licensed as it involves more parties and more money. In short, bonded means you have teamed with a bond company that has money set aside for third-party claims of loss against you, such as unfinished business or damage. 

Most often, being bonded is state-required, and as mentioned before, the process involves three parties: the principal, the surety, and the obligee. The principal is the company or individual buying the bond. The bond company is known as the surety. It backs the bond with a pool of money, such as a line of credit. And the obligee is typically the government or municipal agency requiring a bonded status in the first place.

Companies can have several different types of bonds, such as:

• Contractor bond: When you enter into a contract with a third-party client, this bond serves to protect you in that arrangement. Bid bonds, performance bonds, and payment bonds all fall under the contractor bond.

• Business service bond: This bond will protect your company from the outcome of employees stealing from clients. 

• Fidelity bond: If a company deals with dishonest employees — think theft, embezzlement, fraud, etc. — this bond helps to ensure that you’re protected. 

• Court bond: Appeal bonds, injunction bonds, and cost bonds all work to speed up the court process, making court issues go away quickly. 

What Does It Mean to Be Insured?

Aside from the fundamental risks of doing business, each industry has unique vulnerabilities. Third-party lawsuits, financial damage, data breaches, and more happen every day. Being insured transfers these risks to someone else via an insurance product. Here are some of the most comprehensive policies:

• General liability (GL): This policy protects a company from the most basic exposures of doing business, such as the well-known “slip-and-fall” claim. It also safeguards against third-party personal property damage, product liability, damage to rented space, and personal or advertising injury claims.

• Professional liability: Also known as errors and omissions (E&O) or “malpractice” insurance, professional liability protects your company if it causes third-party financial loss by an act, error, or omission in the professional performance of service. 

• Cyber liability: If a cybercriminal should attack your company, causing a data breach, this policy will protect your business from lawsuits, penalties, and fines arising from the situation.   

• Commercial property: This policy protects businesses that own tangible property by reimbursing for covered damages to the building.

Are There Benefits to Being Licensed, Bonded, and Insured?

Keep in mind that being licensed, bonded, and insured isn’t always required — but it sure has benefits!

Financial Protection

Many business owners will find the cost of forgoing bonds and insurance a hefty price to pay. Let’s be real; replacing expensive equipment or technology can drain a company’s financial reserves quickly. Plus, legal costs can add up to hundreds of thousands of dollars, shuttering or bankrupting a business. Having the appropriate backing can ensure that your company is in it for the long haul. 

Highlights Legitimacy

Whether you’re a multi-crew organization or a solo bootstrapper, clients want some assurance that you’re the real deal. More than colorful polos or matching hats, your business must be legitimate from the inside out, starting with the appropriate status. Companies who are licensed, bonded, and insured tend to stay in business longer than those who aren’t.

Client Compliance

Aside from motivating client confidence, sometimes a specific status is required before you land the contract. Many organizations need particular bonds to be in place before signing the dotted line. Also, working with a company without at least general liability insurance is often a recipe for disaster. So, most larger clients won’t do it. 

What Do Small Businesses Honestly Need?

While having the status of licensed, bonded, and insured is much sought after, needing it depends on a few factors, including:

• Industry
• Business size
• Number of employees
• Equipment operated (including vehicles)
• Handling of sensitive data

Understanding the details of what liability coverage your company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection.