Surety bonds explained: what a bond is, who it protects and how to get one

Sooner or later a contractor hears "are you bonded?" Sometimes it comes from a state licensing office, sometimes from a city permit desk, sometimes from a property manager, and sometimes from a homeowner who has heard the word and wants to hear yes. Bonds confuse people because they look like insurance, are sold by the same agents, and are often mentioned in the same breath. They work differently, and the difference matters to your bank account.

This guide explains what a surety bond is, the bond types service businesses run into, how the federal rules and the SBA program fit in, and how to get bonded. It is general information, not legal advice. Bond requirements for licenses and permits are set by states, counties and cities, so check the rules where you work.

What is a surety bond?

A surety bond is a written guarantee involving three parties:

• The principal is your business, the party making the promise.
• The obligee is the party the promise is made to and that the bond protects: a government agency, a project owner, a general contractor, or sometimes a customer.
• The surety is the bonding company that stands behind your promise and pays valid claims if you do not keep it.

The promise depends on the bond. A license bond promises you will follow the rules attached to your license. A performance bond promises you will finish the job described in the contract. A payment bond promises you will pay your subcontractors and suppliers. If you break the promise and the obligee makes a valid claim, the surety pays, up to the bond amount.

How is a bond different from insurance?

Insurance is a transfer of risk. You pay a premium, and when a covered loss happens, the insurer pays and generally does not come back to you for the money. Your general liability policy exists to protect your business.

A bond is closer to credit. The surety is lending its financial strength to your promise, and it underwrites you the way a lender would: your credit, your finances, your experience, your track record. If the surety pays a claim, it will generally look to you to repay it. That is why sureties typically ask the business, and often its owners personally, to sign an indemnity agreement before they issue bonds. The SBA lists the indemnity agreement among the documents a surety submits when it claims reimbursement under the SBA program, which tells you how standard it is.

Read the indemnity agreement before you sign it, ideally with your attorney. It may reach your personal assets and your spouse's, depending on who signs. Owners who formed an LLC to separate business and personal risk are sometimes surprised to find they have personally guaranteed their bonds. Our guide to LLCs and sole proprietorships explains the separation the LLC does provide.

The bond types service businesses run into

License and permit bonds

Some states, counties and cities require contractors in certain trades to post a bond to get or keep a license, or to pull permits. The bond gives the agency, and sometimes consumers, a source of payment if the contractor breaks the rules tied to the license. Which trades need one, the amount and who can claim against it vary widely. Check with the licensing board in each place you work; our state guides list the licensing agencies for each state.

Bid bonds

When you bid a public or large commercial job, the owner may require a bid bond. The SBA describes it as a bond that ensures the bidder will provide full payment and performance bonding if it wins. It discourages contractors from bidding low and walking away.

Performance bonds

A performance bond, in the SBA's words, ensures full completion of the contract. If you default, the surety may arrange for the work to be finished or pay the owner, up to the bond amount, and then look to you.

Payment bonds

A payment bond ensures full payment to the suppliers and subcontractors on the job. If a sub or supplier on a bonded job goes unpaid, the payment bond is where they turn, which is why owners and general contractors insist on it. Our mechanics liens guide explains liens on private jobs.

Ancillary and other bonds

The SBA also lists ancillary bonds, which cover requirements outside performance or payment, such as maintenance. Separately, some cleaning and home service companies carry bonds that respond when an employee steals from a customer. Read the wording of any such bond carefully: what it covers, whether a conviction is required, and who can make the claim.

Federal and public jobs: the Miller Act

If you want federal construction work, bonding is not optional. Under the Federal Acquisition Regulation, the Miller Act requires performance and payment bonds for any federal construction contract exceeding $150,000. Contracting officers can require bonds on smaller contracts under other authority.

Bonds on federal work must come from a surety the US Treasury accepts. The Treasury's Bureau of the Fiscal Service publishes Department Circular 570, its list of companies approved to write or reinsure federal bonds. State, county and city public projects follow their own bonding rules, set by state and local law. The bid documents will say what is required; read them before you price the job, because the bond premium is a real cost.

How the SBA surety bond guarantee helps small contractors

New and small contractors often struggle to get bonded because they lack the track record and financial statements sureties want. The SBA's Surety Bond Guarantee Program exists for that gap. Under it, the SBA backs bid, performance and payment bonds written by participating sureties, which makes those sureties more willing to bond small firms.

Key figures from the SBA, as published in 2026:

To qualify, the business must be small under SBA size standards, the contract must be within the limits, and you must meet the surety's own credit, capacity and character standards. The guarantee does not replace underwriting; it makes the surety more comfortable taking you on. You apply through an SBA-authorized surety agency, which the SBA lists in a directory on its site. The surety itself still charges its own premium on top of any SBA fee.

How to get bonded

1. Find out exactly what is required. Get the bond type, amount and the obligee's wording from the licensing office, permit desk or bid documents.
2. Use an agent who writes surety. Many insurance agents do, but some specialize. A surety-focused agent knows which companies bond new contractors.
3. Get your financials in order. For license bonds, personal credit may be most of the underwriting. For contract bonds, expect requests for business and personal financial statements, tax returns, a list of jobs completed and in progress, and your bank relationship. Clean books make this far easier; see our bookkeeping guide.
4. Read the indemnity agreement. Know who is signing personally and what it covers.
5. Track bond expiration dates. A license bond that lapses can put your license at risk. Put renewals on the calendar.

Over time, sureties set a bonding capacity for your company: how large a single job and how much total bonded work they will support. That capacity grows with your track record and your balance sheet. Paying suppliers on time, finishing jobs, and keeping clean financial statements are what move it.

Saying "bonded" in your marketing

"Licensed, bonded and insured" is one of the most copied phrases on contractor websites, and it is often only partly true. Say "bonded" only if you hold a bond that applies to the work you are advertising, and be ready to name it. If a customer or property manager asks, send the bond details as readily as you send a certificate of insurance. Accurate claims are a better trust signal than a generic badge, and they keep you out of trouble with your licensing board.

When you list credentials on your website, state what each one is and keep the page current when a bond or license renews.

Frequently asked questions