Have you been hearing the phrase, “licensed, bonded and insured” and wondered why it was important? You’re in the right place to learn about what the phrase might mean for you and your business.
Licensed
“Licensed” is probably the most obvious and least confusing part of the phrase. Almost every business requires a license of some kind, whether that means registering the business with the Secretary of State or involves a more complicated process like taking an exam and disclosing extensive financial information.
Whatever the requirements for business licensure, working with a company you know is licensed is reassuring. Their licensure proves that they went through the appropriate channels to get licensed. When it comes to tests, fees, or other prerequisites for licensure, you can be sure that the licensee has done what’s required. A majority of businesses display their licenses, or are legally obligated to, and so you can look up their license with the government entity that issued it to verify that it is current.
Understanding the Importance of Being Licensed for Your Business
This is the part that can get confusing�why does it matter if the business is bonded? As we covered in our previous post, “What is a Surety Bond, Anyway?” surety bonds are contracts between three different parties:
- The principal�the person or business purchasing the bond
- The obligee�the entity requiring the purchase of the bond
- The surety�the company providing financial backing for the bond
So why do some companies advertise themselves as “bonded?” It’s because that surety bond is a form of protection for customers while also communicating that the business is compliant with the law, as surety bonds are usually a legally required purchase. As with licenses, surety bonds can be verified through the surety company issuing the bond.
Some businesses, especially cleaning services and other in-home businesses like pest control, purchase a surety bond even though they aren’t required to by law. If a business is bonded even though they don’t have to be, they’re providing an extra layer of security and conveying their trustworthiness to clients. A bond is, first and foremost, a promise by a business to obey the law and conduct business ethically. Should the business break that promise, a bond provides a way for customers to seek reimbursement.
Further, getting bonded is a thorough process involving underwriting, which means that the applicant’s financial history is examined. Surety companies avoid writing bonds if they believe the bond to be high-risk, meaning the bondholder is likely to use the surety bond. If the surety company believes the bondholder is too high-risk and unlikely to reimburse paid claims, they can refuse to write the bond.
A bonded business invokes trustworthiness because it’s in the best interests of both customers and the business to abide by its terms. If a business has to use their surety bond, there can be consequences�the bondholder has to reimburse the surety company for claims that are paid, the bond’s premium might increase, and the business might face consequences like fines or losing its license. Bonded businesses will surely work to avoid those consequences.
Insured
You probably already know what it means to be insured, but businesses must often carry many different types of insurance. These can include workers’ compensation, professional liability, or property, among others. Insurance is almost always a requirement for business licensure and it’s especially important when it comes to professions like construction. Just like with licenses and surety bonds, you can call the insured’s insurance company to verify that their policy is current.
Many businesses use the phrase “licensed, bonded and insured”�in advertising to establish trust with potential customers. You can always confirm that the business is advertising truthfully by verifying their license, bond, and insurance policies. Using the phrase is another way of making a promise (or three!) to customers.