Bonding for Small Businesses

Bonded and insured. You’ve probably seen this phrase printed on business cards and in online and newspaper advertisements for all kinds of businesses, ranging from tree trimmers and locksmiths to commercial painters and janitorial services. But what exactly is bonding? And is getting bonded something that’s critical for your business?

A bond is a type of guarantee that usually provides a way to recoup losses. There are a number of different types of bonds that serve various purposes. The following are the main types a small business might use.

Commercial Bond

In many industries, commercial bonds are legally required before a company can operate a business. These industries typically include travel agencies, car dealerships, collection agencies, gyms and health clubs, and telemarketing firms, to name a few.

Also referred to as license or permit bonds, these bonds help prevent consumer fraud by keeping unscrupulous and unqualified businesses out of the marketplace. They are obtained by businesses from their state or local government, which verifies that the business is operating in compliance with its industry’s specific regulations.

Surety Bond

The purpose of a surety bond is to ensure that contracted work is performed according to agreed-upon specifications. There are three participants to the agreement: the principle, or the company that is contracted to perform the work; the obligee, or the entity for whom the work is being performed; and the surety, which is providing the bond.

A surety bond is purchased by the principle on behalf of the obligee. If the principle fails to complete the work per the terms of the contract, or causes any kind of damage or loss while performing the job, the surety will pay the amount of the bond to the obligee. Construction, maintenance, information technology, security and alarm, and janitorial companies often must purchase surety bonds in order to be considered for jobs, especially government contracts.

While the surety is usually an insurance company, a surety bond is not insurance; rather, it is a form of credit in which the principal is responsible for reimbursing if any claims arise as a result of not abiding by the terms of the bond. The alternative to a bond would be to post cash or secure a letter of credit. Bonding is generally preferable though because it typically requires no collateral, thus freeing up capital for other more productive uses.

Fidelity Bond

Fidelity bonds are more similar to insurance policies because the principal, rather than the obligee, is the beneficiary of the bond’s proceeds.

There are two types of fidelity bonds. One protects employers from employee fraud and embezzlement, while the other protects employers from theft committed by employees while they are performing work on a customer’s premises. The former will reimburse a business if an employee is convicted of fraud or embezzlement, while the latter will enable the business’s customer to recover claims if the business’s employee is convicted of theft or other wrongdoing.

One common example is a janitorial services bond, which provides protection for customers of cleaning businesses whose employees have easy access to their customers' assets and personal belongings. Similar types of bonds are available for other businesses whose employees perform work on their customers’ premises, such as computer repair consultants and commercial painters.

Tax Bond

This type of bond is used to obtain release of an Internal Revenue Service tax lien placed on a business’s property. The lien will be lifted within 30 days of the IRS accepting the bond. It is typically used by companies that do not have sufficient liquid funds to pay off the tax debt themselves.

Don Sadler is a freelance writer and editor specializing in business and finance.

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Despite Recovery, Small Businesses Still Mired in Recession

The economy as a whole may have emerged from the recession in the summer of 2009, but for small businesses, the downturn is now entering its thirty-sixth month. Weak sales remain the top problem, according to the National Federation of Independent Business (NFIB). Until that changes, hiring and spending on capital projects will remain stagnant.

"The hope for a pickup in the small business sector did not materialize, but new weaknesses did not appear either," said NFIB Chief Economist William C. Dunkelberg, commenting on the organization's latest survey of small business members. "Overall, owners remain stubbornly cautious and uncertain about the future course of the economy and their business prospects."

The problem can be summed up in a word: jobs, or the lack thereof. Until the economy starts putting people back to work, small businesses will remain hunkered down, neither spending nor hiring. The issue is critical because small businesses have traditionally produced the lion's share of new jobs and have led the economy back to health in every previous recession.

But it's not happening this time. Although the economy has been adding jobs for the past 12 months, the rate of growth doesn't even cover the number of new people entering the job market, let alone the millions of Americans who have been thrown out of work.

The economy logged another month of job gains in December, according to the latest Department of Labor figures, which President Obama praised this week. But a new analysis by the Economic Policy Institute, a Washington-based think tank, found that the numbers don't reflect the true nature or depth of the problem.

Though the seasonally adjusted unemployment rate dropped to 9.4 percent from 9.8 percent in December, half of the improvement occurred because 260,000 people stopped looking for a job. When that happens they are no longer counted in the statistics. In fact, the labor force participation rate, 64.3 percent, is at its lowest level since the recession began.

"Incredibly, the U.S. labor force is now smaller than it was before the recession started, though it should have grown by over 4 million workers to keep up with working-age population growth over this period," the analysis noted. "The bad news is that -- three full years after the recession officially began -- the U.S. is still near the bottom of a deep crater."

How deep?

The institute estimates that about 4.4 million workers make up this invisible army of unemployed dropouts. If just half of them were counted as "officially" unemployed, the real jobless rate would be 10.7 percent.

But the problem doesn't end there; it also extends to those who are working. The Labor Department figures don't reflect the underemployment rate, made up of millions of people who want full-time jobs but have had to settle for part-time jobs with less pay.

Although those numbers declined slightly in December as well, the underemployment rate is 16.7 percent. And that doesn't include the legions of workers who are underemployed because they have taken jobs that are below their skills, training, or experience level, according to the analysis.

When all those factors are taken together, more than 26.1 million workers are either unemployed or underemployed. Of those, 6.4 million workers have been unemployed for longer than six months. While the numbers seem staggering, the task of digging out of the economic crater is equally formidable.

The economy is still 7.2 million payroll jobs short of where it was at the start of the recession three years ago. In addition, the economy would need to add 3.7 million jobs just to cover those who entered the workforce for the first time since then. "This means the labor market is now nearly 11 million jobs below the level needed to restore the pre-recession unemployment rate" in December 2007, which was 5.0 percent, according to the analysis.

Indeed, we remain near the bottom of a very large crater. But what's worse, our capacity to dig our way out is also hampered, because real wages and hours worked are essentially stagnant. The average work week held steady in December at 34.2 hours, barely higher than the recession's low point of 33.7 hours in October 2009. Meanwhile, wages are growing at only a 1.8 percent annualized rate. The meager growth of paychecks has all but taken consumers out of the equation as a "driving factor of the recovery," the analysis states.

To get back to the December 2007 unemployment rate, the economy would need to add 300,000 jobs every month for the next five years. Obviously, the 103,000 jobs added in December pales by comparison. Looking forward, the picture isn't much brighter.

In November there were 4.6 workers for every job opening advertised, according to a separate report by the U.S. Bureau of Labor Statistics. That's an improvement from the depth of the recession, when the ratio was 6.3-to-1 in July 2009, but still well above the 2007 average of 1.5 workers for every job. In short, no jobs exist for three out of four unemployed workers. And if the underemployed and dropouts are added, the ratio swells to 7.4 workers for every job.

As things now stand, the economy is unlikely to grow its way out of this hole on its own. The World Bank estimates that the U.S. economy will grow 2.8 percent in 2011, compared with a mean forecast for 2.7 percent growth by economists polled by Reuters. That's "too soft" to put a meaningful dent in the jobless rate, the bank concludes. On the high side, the U.S. Chamber estimates that the economy will expand by 3.2 percent and add 2.4 million jobs. Either way, it's not enough.

So the question becomes, What needs to happen to get the economy going? The Small Business Jobs Act, signed into law by President Obama in September, contains $12 billion in tax breaks for businesses, but no direct incentives for hiring. The administration is counting on stimulating capital investments and certain other actions to spur businesses to create new jobs. But given the size of the problem, that's not nearly enough.

If the nation ever hopes to dig its way out of the job crater, lawmakers need to get far more serious about creating jobs, to the point of creating a Roosevelt-era public jobs program. And they need to devote far more resources to small and startup businesses. Otherwise, the economy will remain in a deep crater for years to come, creating a lost generation of young people and an increasingly impoverished older generation.

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