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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Featured Biz Question

What exactly does "being bonded" mean?
What advantage does it have?
How do you go about doing it? What is the cost associated with it?
Looking into starting a home-based business where I'll be doing inventories of other people's homes (valuables, collectibles, etc...) for insurance purposes.
Thanks for your help.

Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.

Business Bonding

Dear Schmoozer:

Bond. James Bond. (Sorry, I couldn't resist!)

But while we're on the subject of Hollywood movie characters, how 'bout I use their way of doing business as a familiar way of explaining what exactly "being bonded" means?

Let's Go to the Movies. . . .

Suppose you want to produce a film, which costs about $50 million. To pay for the cost of production, you'll get financing from a financier. Suppose he gives you $50 million. Further, you have a distribution deal lined up where the distributor will pay you a good chunk of the production cost upon completion of the film.

Now, if the film is completed within budget and delivered to the distributor, all is well and the financier recovers a good chunk of the initial investment. But suppose the director decides he just doesn't like a particular scene. He reshoots it; then reshoots it again. Ten days later, he's still reshooting the same scene. Finally, he's exhausted the $50 million budget and has only finished one-third of the film. The film isn't completed and can't be distributed. All $50 million is lost to the financier.

Obviously, this is a completely unacceptable situation. So the financier demands some control to ensure the film will be completed in a timely fashion and at a reasonable cost. One way he can do this is to check on the production and keep it on schedule. Like an watchdog on duty, there are companies whose purpose it is to make sure projects get done according to plan.

These companies are called specialized bonding companies. They effectively protect the financier's investment and guarantee a film will be produced. These companies evaluate the script and watch the film budget very carefully. If need be, they have the option to lend the production more money, modify what's happening on the set, and/or take over the entire production if the budget gets too out-of-control. Or, not as common, they might just scrap the work that has been done and repay the financier the money that has been borrowed and spent to date. To provide this service, these bonding companies might charge a fee of 5% of the total estimated budget of the film.

Having a production guaranteed in this way is to have the project "bonded." Technically, this is called a completion bond or a completion guarantee in the film industry.

Okay, so how does this apply to small business? continued

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About the Expert

Peter Hupalo
Owner of HCM Publishing, Inc.
Peter investigates the latest computer-programming technologies and researches companies for investment. He also writes a column about entrepreneurship and small business for and reviews biz books. Peter wrote Thinking Like An Entrepreneur, about how to make savvy business decisions and take real control of your financial destiny. more