Does Your License Require an Extra Form of Security? Why Surety Bonds Are the Smartest Choice

Surety bonds are a smart and flexible option for licensed professionals who need to meet regulatory financial requirements without tying up working capital. From plumbers and contractors to freight brokers, many businesses and professionals must provide financial guarantees as part of licensing requirements. While options like a cash deposit or a letter of credit fulfill licensing needs, Merchants Bonding Company™ provides surety bonds that stand out in cost, convenience, and business impact.

Understanding Your Security Options

Feature	Cash Deposit	Irrevocable Letter of Credit (ILOC)	Surety Bond
Ties Up Capital?	Yes - 100% held in cash	Yes - 100% collateral required	No - Only a small annual premium
Impact on Liquidity	Reduces cash for operations or growth	Limits borrowing capacity	Preserves working capital
Protection from False Claims?	No - Funds may be released without review	No - Bank pays without investigation	Yes - Surety investigates validity before paying

    

A cash deposit requires setting aside the full required amount in cash for the duration of your license, and sometimes even longer. This reduces your liquidity and limits your ability to invest in growth or daily operations. In some cases, regulators may hold the funds even after the license expires.  

However, it remains a straightforward method to meet licensing security requirements.  

How an Irrevocable Letter of Credit Works 

An irrevocable letter of credit (ILOC) is a bank-issued guarantee for payment up to a specified amount if certain conditions are met. To obtain one, professionals typically must provide 100 percent cash collateral.

Like cash deposits, ILOCs tie up capital and reduce operational borrowing capacity. They also come with fees and require bank approval. If a claim is filed, the bank pays the obligee, without investigation, leaving the professional with no recourse or protection against false claims.

While desirable to regulators for their immediacy, LOCs offer limited flexibility or protection for licensees.

How a Surety Bond Works

A surety bond is a three-party agreement where a surety company guarantees a professional’s obligations to the regulator or obligee. Instead of tying up the full bond amount in cash, the professional pays a small annual premium, typically a percentage of the bond amount.  

If a claim is filed, the surety investigates its validity before paying. If valid, the surety pays and seeks reimbursement from the professional.  

In all cases, cash deposit, LOC, or surety bond, the professional is ultimately responsible for repayment if obligations aren’t met.  

Why Surety Bonds Are the Best Option

When permitted by obligees, surety bonds offer significant advantages:

• Preserve working capital and credit lines for daily operations and growth.
• Avoid tying up 100 percent collateral as with cash deposits or ILOCs.
• Gain added protection through claims investigation, which reduces risk of invalid claim payments.

Additional benefits include:

• Predictable annual premiums for easier budgeting.
• Scalability across multiple licenses or locations.
• Speed and convenience of digital issuance.

When staying liquid and compliant is essential, a surety bond is the most cost-effective and flexible security option available.  

Surety Bond Basics: The Three-Party Agreement

A surety bond involves:

• The Principal: The business or individual required to fulfill an obligation (e.g., a plumber).
• The Obligee: The entity requiring the bond (e.g., a government entity). 
• The Surety: The bonding company, like Merchants Bonding Company, that provides the financial guarantee.

Unlike insurance, which protects the business, a surety bond guarantees to the obligee and/or the public that the principal will meet their obligations. If they fail, the surety investigates the claim and, if valid, pays the obligee, then seeks reimbursement from the principal.  

At Merchants, our Claims department plays a key role in investigating claims fairly, reinforcing compliance, and protecting licensees from frivolous claims.   

Getting a Surety Bond from Merchants

Obtaining a bond through Merchants is fast and streamlined:

1.    Apply & Qualify

Submit basic business and license information to your agent or through Merchants’ digital tools. Many license and permit bonds require minimal documentation for issuance. Merchants uses common sense underwriting to make approvals efficient for qualified applicants.

Surety bonds are issued by Merchants through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by Merchants to underwrite your bond.

2.    File the Bond if Required

Once issued, some surety bonds must be filed with a government agency or obligee. Your agent will help ensure its sent to the right place.

3.    Renews When Needed

Many license and permit bonds require annual renewals. Merchants supports agents with clear renewal processes to help you stay compliant.

Surety Bond Benefits for Licensed Professionals

Using a surety bond instead of a letter of credit or cash deposit offers:

• Regulatory compliance without tying up capital.
• Fewer administrative hurdles: no collateral, fees, or complex bank approval.
• More time to focus on business, not banking logistics. 
• Increased regulatory confidence and smoother renewals.  

Get a Surety Bond from Merchants Today

When a license requires added financial protection, a surety bond is often the most efficient solution. Whether applying for a new license or renewing an existing one, a surety bond simplifies compliance, preserves capital, and supports business growth.

To learn more, use our Find an Agent tool to get started.