"I can get the bond for half that price"

I can’t tell you how many times I will send a client a written approval only to hear, “I can get the bond for half that price!” Let me start off by saying, “actually no you can’t”.

Many surety bond agencies will tell their clients the best possible rate, just to get the business. Unfortantly, these rates are truly only for principals with the best credit and or business financials. It is a common practice, but time and time again the same customers that told me I was ripping them off come back after finding out they were never actually approved at that rate. The real kicker is when the client thinks they are approved at a great rate only to find out that the agency can’t even get them the bond due to bad credit.

So beware, when an agent claims he/she can get the bond for you at a great rate, it is usually to good to be true unless your finances can support the risk at the given rate.

How to protect yourself:

  • Be sure to ask if you are approved at that rate
  • Ask for the approval/quote in writing
  • Check your credit prior to applying (anything below a 670 is questionable)

Performance Bonds - How times change

Turning back the clock…..and bond agents working for a living.

Performance BondingDo you recall the late 90′s and way early in 2000 when getting approved for contractors Performance & Payment bonds were as easy as having a pulse? “Oh, you’re breathing? You’re approved!” That time period was an interesting but a rather frightening time in the surety industry. All the bonding companies began to become more and more competitive in this dog eat dog industry, so much that sureties were giving things away to contractors! Waving your spouse from the agreement? SURE! waiving personal indemnity all together for that matter! Dropping rates down to $6 per thousand….the list goes on.

Since the sureties have exceeded losses in the past couple years more than the losses they had throughout the whole past decade, has forced them to re-group themselves. Underwriting has taken an entire swing the other way and is incredibly conservative in all spectrums of underwriting. Aggregate bond lines have been sliced in half, rates have doubled, the re-insurers even writing surety have dropped to a measly 10 and all of this is all a snowball effect of one thing affecting another. However, In the end, it does change the industry in a positive way.

Performance BondingFor one thing, it means that any contractor OR sub-contractor with a Performance bond in hand for the guarantee of their contract, likely, truly is qualified to get that job done-AND will get it done per the terms of their contract.

The obligee (who is requiring the bond) won’t feel the reluctance in accepting a bond as they may have in the soft bond market previously due to the soft underwriting that was occurring. Previously, many contractors still defaulted on jobs, and did so more willingly with no personal indemnity on the line.

Now, there is a rigorous underwriting process that each contractor must face. And there should be! Applying for a bonding line of credit and or Performance bond is just like applying for a line of credit from your bank. It is CREDIT. In this case, it’s not simply just to pay back a loan but to actually perform on a contract. Of course, with this type of guarantee the bonding company must make, their research into each contractor is complete.

This makes performance bonds not only a stronger tool for the owner that accepts them, but it sure does make us agents work for a living!

Surety Bond Rates Explained

Anyone who has applied for a surety bond recently knows the market has drastically changed over the past couple of years. As a broker I can tell you, people are shocked and down right outraged at times when they find out what the going surety bond rates of your average T-listed bonding company.

A couple years back you could apply for a surety bond without even having your credit pulled, not to mention the bond rates were a fraction of the price. I had one gentleman call me yesterday about a motor vehicle dealer bond; he was outraged when he found out what his bond would cost annually, even going as far as to tell me I was giving him the “rip-off rate” (a rate we do not offer).

Why the high premiums and occasional cash collateral? Bonding companies had a massive amount of claims over the past couple of years. One underwriter told me that they had more claims in the past two years then the previous ten! Many Bonding companies dropped in their ratings and some had to close their bond department. Since then, sureties began pulling credit reports and raising surety bond rates to help cover loses. If you had bad credit you were denied throughout the country. More recently, bad credit surety bond programs came about; approving principals even with bankruptcies for large premiums and cash collateral.

What can you do about the current bond market? Keep your credit clean, (read our previous post: Bad Credit Surety Bonds) and do not submit your applications to more than two bond agencies max. When one bond agency submits to a surety it closes the door for other agents to get quotes from the same surety (the sureties do not look kindly upon clients browsing prices). Your best bet is to find an agency with many bonding companies at their disposal.

The surety bond market has changed, but like any market it is cyclical and will eventually return to lower rates. For now, keep your credit clean and be content with a rate that is two or three times as high as what was paid a couple years back. With any luck, everyone will have smiles ear to ear in a couple years with the return of the low rate surety bond market.