Commercial surety bonds have a broad range of rates lately. Bonding companies are writing premiums ranging from 1% to 20%. This 20% premium can be extremely costly even for a small bond. What does an agent look for when setting these rates? This posting will attempt to explore the manner of which bonding companies come to this conclusion. Later, we will explain how to decrease your rates.
Writing a commercial bond is not as simple as checking your personal credit. Among the many considerations are: corporate financial statements, private financial statements of owners and their spouses, personal credit of owners and possibly spouses, some general pedigree information, bond forms size and legal language, and sometime the principles professional experiences (resume). Some specialty programs may require more or less information for certain classes of business, but the above is typically what is expected to be submitted when applying for a commercial bond.
Once a surety has this information, they will qualify the applicant or decline them if they fail to meet the criteria in their underwriting guidelines.
The Application: A general surety bond application asks for information to learn the basics of the guarantee. Data such as principal / obligee contact information, bond amount, corporate and personal information and the like. Any data collected that is inaccurate or missing could cause a declination of your application for the commercial surety bond. Some bonding companies will decline if they know the obligee is unfavorable.
Financial Statements: The core decision to writing a bond is in the business financial statements. The surety will carefully review this critical information that is the basis of acceptance or declination. Handwritten ledgers are not professional and an accounts statement from the CPA will surely go a long way when applying for a bond. The accrual method is recommended as it reveals a clear view of your business. This compilation of your statements including disclosures and full notes will be orderly and easy for the surety to follow. Avoid cash basis practices. This method is unclear when it comes to balance sheets and may confuse bond producers in their thought process. Internal business financial statements are acceptable for $200,000-300,000 bonds and less but a CPA is the better way.
Bond producers are also looking for owners’ personal financial statements as well. Net worth is highly regarded and sureties want to know if your liquid assets are enough. Assets such as life insurance, personal property and autos are not real considerations. Liquid cash and real estate ownership are the high runners and necessary.
Resume: These credentials assure the bonding company that the principal is competent in their field. The more experience you have may result in lower rates depending on the sureties’ confidence factor in your business avoiding claims. The resume is a critical component in the application process of a new business. Because new businesses do not have financials, Sureties rely heavily on an applicants resume in a way to get to know them.
Bond Form: As mentioned above, this is the language used when writing a bond. When the obligee creates a bond, they must precisely state what this particular bond is supposed to do. The bond is a guarantee. The specifics of the bond may determine the rate of the bond. A business class such as freight brokers is more risky than others so, the bond form must be carefully written. Otherwise claims could occur and the bond may become high risk. Bond producers view two clauses in detail. They are cancellation clause and aggregate clause.
A Cancellation Clause simply states that a surety has authority to cancel a bond. The bonding company is relieved of any liabilities. A 30 or 60 day written notice is required to the principal and obligee.
The Aggregate Clause is a statement about amount of claims versus bond amount. For obvious reasons a single claim or combination of claims cannot exceed the amount of the bond, for example a 75,000 bond may not have a claim or claims exceeding 75,000 and the surety will not pay on any additional claims.
Personal Credit: Credit reports are deceptive in that you are mislead by thinking that the score is all that matters. Bonding companies delve deeper into items that are more significant.
Bankruptcy: A definite down side of declaring bankruptcy is that it feels like it can haunt you forever. The same holds true here in that sureties will hold you in the high risk programs until 7 years of an account’s discharge.
Tax Lien: Bond producers treat tax liens the same as bankruptcy. High risk program applies for non paid or not nearly paid at the 7 year mark for most agencies.
Civil Judgment: If you have ever had a civil judgment some bonding companies won’t write you under any circumstance. Other agents may review your explanation after judgment is satisfied and qualify you. Check with your agent if this is important to you.
Unpaid Collection: Although unfavorable, if your credit report reflects a collection but it is now paid, you may still qualify for a bond. Any unpaid collection is negative and if you are not declined, you will certainly be placed into a high risk surety bond program.
Late Child Support: You may be surprised to find that unpaid child support payments are the worst-case scenario. No bonding company will write you if you are in this circumstance and you may be forced to seek other alternatives. High risk program is out of the question for unpaid child support.
Do bonding companies look at credit scores at all? Of course they do but there are many other considerations to observe. A score higher than 650 tells the bond producer that there are little anomalies and your chances for qualifying are very good. Some agencies are conservative while others are liberal in underwriting a surety bond and their decision will vary depending on what they are looking for.
