Surety bond underwriters want to say yes. Hard to believe, right? But the fact of the matter is that surety companies are in the business of issuing bonds, not denying them.
So why does it seem to take forever and require so much information?
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The list of possibilities will, of course, be unique to you and your company’s history. But here are three things that a contractor needs to nail down if they expect to get a “yes.”
- Check your credit.
Many contractors are surprised that they can obtain bid, performance or payment bonds up to $750,000 with underwriting that is largely based on their personal credit score and positive references from previous project owners or general contractors. Right or wrong, surety carriers have found that good credit is a strong indicator of a contractor’s commitment to complete a project and pay the associated subcontractors and suppliers.
Each carrier utilizes a proprietary method for reviewing credit, however, a FICO score above 700 is typically sufficient. Also, even if your bond needs exceed $750,000, the company’s owner’s credit is still heavily considered as part of the underwriting process.
- Get your financial statements in order.
If your personal credit score is not strong, or you are looking for a large and sophisticated surety program, the underwriting can be supplemented with corporate and personal financial statements. A surefire way to get denied or lengthen the process is to turn over financial statements that are incomplete, inaccurate or worse. You do not necessarily need to have a CPA sign off on your financial reporting, but it sure does help. A well-prepared set of statements gives underwriters comfort that you have a more sophisticated operation. At a minimum, make sure your quarterly or annual statements tie between the balance sheet and income statement, along with the supporting aging A/R and A/P schedules.
- Do not overextend.
Let us assume you have been in business a while, have a solid track record and have been profitable. A big job comes up and you want it! You pour everything into preparing a bond request, including hiring that CPA to help, but, despite your efforts, get declined or only offered onerous terms and conditions. What happened? Well, part of the bond application review involves comparing the size and scope of the proposed project with projects that you have completed in the past. In other words, bidding on jobs that are significantly larger in complexity, outside of your area of specialty or physically far from your typical operating area is not going to help. You will be viewed as over-extending yourself, and will need to present a clear business plan on how you will mitigate these new risks or take smaller steps on your growth path and be patient. You will get there eventually.
There are many facets to surety bond underwriting, however, these three tenets hold true regardless of if you need your first bond or your thousandth.