The Hidden Realities of Surety Bonds

Ever wondered why businesses opt for surety bonds? Are they as beneficial as they seem, or is there a hidden catch that you're not aware of? Join me, your host Mike, as I navigate this complex topic, offering insights from my own experience running a house cleaning service. I’ll be explaining from the ground up what surety bonds are and why they might not be as advantageous as they appear to be.

But, don't worry, it's not all doom and gloom. I also explore the reasons why, despite my skepticism, many still appreciate the idea of having a bond for their protection. From the peculiarities of a janitorial bond to the peculiar scenario where reimbursement takes place, I will be exposing realities that are often misunderstood in this system. So, get ready for a journey of enlightenment that might just leave you questioning, 'what's the point of having this bond in the first place?'

Transcript

Speaker 1: 0:01

Hey everybody, mike here and welcome to Task Force Entrepreneur. The podcast I started went from being a tech engineer to starting a house cleaning business. Yep, that's my story and I'm sticking to it. I hope you enjoy the show. Hey, welcome back to Task Force Entrepreneur.

Speaker 1: 0:19

In today's show we're going to talk about what a surety bond is and we're going to talk about why it's also sort of a scam, so we're going to jump right into this. So when you talk about a surety bond, a surety bond is basically a guarantee from a company to a client or customer that it will fulfill some sort of obligation and if it doesn't, then the customer essentially has recourse to get reimbursed somehow, right. So a lot of times you see trucks driving around that say bonded and insured. A lot of times the bonded piece refers to a surety bond. Now, in the case of, for example, my business, mission Cleaning Services cleaning company, they have what they call janitorial bonds, which is just a surety bond under a different name, and basically the way it works is this I, as a business owner, find a provider of janitorial or surety bonds and I pay them for some level of protection. So we'll say I think I've seen prices like $100 for $10,000 a year of protection, right? And it's important to know that this is not insurance, and that's part of why I'm kind of labeling it a scam. And, to be fair, it's not really a scam, right. It's just a misunderstood structure, right. People just don't know about this stuff. But so I pay $100 for $10,000 of protection and that protects me, so that if one of my employees were to make the very, very poor decision to steal from one of our clients while in their home, then the client has recourse financially. They can say hey, mike, you know they stole this, and then my surety bond or janitorial bond will reimburse the client for up to $10,000.

Speaker 1: 2:12

Now that sounds great, doesn't it? That sounds win-win, right? The client got, you know, reimbursed for what was taken wrongfully and the company was protected, right. Well, that's where things get a little muddy. So the way they actually work is, in the case of the janitorial bond for cleaning company, right, you take the bond out, just like I described. You can go online and get one, but they don't pay anything until post-conviction. That means, let's walk through the scenario that your employee would have to not only steal something, but they would also have to be convicted in court, meaning it would have to be proven, and then only after then, the janitorial bond will pay or reimburse the client for any losses, up to $10,000 in this example.

Speaker 1: 3:06

Now, if you're saying, okay, mike, that sounds fair enough, right? Well, yeah, hang on. There's one more piece to this. Now, at this point, the company has to reimburse the surety company. So you heard me right. I'll say that again After the surety company pays the bond to the customer to reimburse them, you, as the business owner, the one that is holding the bond, you now have to repay that full amount we'll say up to $10,000, back to the surety company.

Speaker 1: 3:38

So, if you're anything like me, at this point you're saying what is the point of having this bond in the first place? And really it's designed to provide a quicker means of gathering the money. So they have bonds that go quite high, right? So let's say, you put a bond up to $25,000, employee stole something very expensive. They go to court, they got arrested, they got convicted, all of that. Right, you didn't have to pony up the 25K right away. Right, you had a little time to gather it.

Speaker 1: 4:12

But in my case, as a cleaning company owner, I don't really see a huge benefit Because, to be completely honest, if an employee was to steal something, I feel it would be very difficult to prove that they had taken something Now. Would I fire them? Yeah, absolutely. Would I try to do right by the customer and reimburse them? Yeah, without a doubt. But the reality is that the way the justice system works, unless someone has video footage of that theft occurring, I see the scenario where you get to convict somebody as being very low. Therefore, I see the purpose of the bond almost never being actually fulfilled.

Speaker 1: 4:58

Now, all of that said, people still like the idea that there is a bond, that you have some protection right. So, scam or not, you might have to do it anyway. But I do think it's important to share with people how this works at a high level and just make sure that at least you're educated a little, because when I found this out, I was definitely kind of caught off guard and taken back a little bit by just not understanding it. Hey, if you found this podcast helpful or you enjoyed it, do me a favor and leave me a review. It's a whole lot and it will help this thing get bigger and hopefully be able to reach a wider audience. So, that said I'll see you next time.