Commercial Bonds: Obtain The Lowest Rate (Part 1 of 2)

There is a great range in rates for commercial surety bonds these days. Principals can see premiums range from 1-15% of the amount of the bond. Even a small bond at 15% can be extremely costly. In part 1 of 2 of this article, we will review what bonding companies look at when deciding a rate. Part 2 of this article will discuss what you can do to better your situation to make sure you are at the bonding companies lowest tier rating.

Commercial bond underwriting takes more than just personal credit into consideration. In general, a commercial bond submission must include: a bond application with general information on the principal, business financial statements and or a resume on the owner(s), personal financial statements of the owner(s), personal credit of the owner(s) and possibly their spouse(s), and the bond form that must be used to create the original bond. There are specialty programs available for some classes of business that will require less information. However, these programs are far and few in between.

A principal must qualify on all surety items named above. A surety can decline a principal if they fail to meet any of the sureties underwriting guidelines. The best way to understand what the surety is looking for is to go through everything one item at a time in detail. Some of the items below can be fixed immediately, others can take years to correct.

General Bond Application: A bond application will help the surety to determine: the bond amount, who is requiring the bond of the principal (obligee), principal’s contact information, owner(s) contact and personal information, etc. A surety can decline an applicant if they find that any of the information is inaccurate. At times, a surety will not want to write bonds when certain obligees are involved.

Business Financial Statement: The business financial statement of the applicant is the bloodline of the company and is one of the most critical items reviewed by the surety when applying for a bond. The statement should be done in an orderly fashion. Handwritten & sloppy internal statements are not recommended in a submission. Instead, it would be wise to contact a CPA to complete at least a “Compilation‿ Financial Statement for your business. This statement should also be done on an accrual method of accounting. This is necessary as it shows a clearer financial picture of your business. The unacceptable method of, “cash basis‿ should be avoided as it does not include several items on the balance sheet making the financial picture “cloudy‿. The CPA business statement should always include full notes and disclosures. In-house financial statements can be used for bonds $100,000 and less, but CPA is still preferred.

Resume: A surety needs confidence in the principal when approving a bond, especially at a low rate. The bonding company wants to know the principal has experience in their field of expertise and they can successfully run a business without triggering a claim.

Personal Financial Statement: Bonding companies are going to want to see that the owner(s) have enough liquid assets. Real estate ownership is also a must for most bond types. Obviously, they will want to see that the net worth of the individual is strong. Items such as life insurance, personal property, automobiles are less valuable in comparison to liquid cash or real estate equity.

Personal Credit: Many have the misconception that score is all that matters on a credit report. There are several items that are just as if not more important in the eyes of a bonding company:

1) Bankruptcy: Declaring bankruptcy can negatively effect you for the rest of your life. Fortunately, most bonding companies will write an account 7 years after it has been discharged. If it is within 7 years, the principal is usually stuck in a high risk bond program.

2) Tax Lien: For the most part, tax liens are underwritten similar to bankruptcies. The majority of sureties like to see them 7 years old and paid. If they are not paid or not far enough in the past, the principal will most likely be in a high risk program.

3) Civil Judgment: Bonding companies vary greatly when it comes to civil judgments. Some bonding companies will never write an account that has had a judgment placed against them. Other bonding companies will write an account with a satisfied judgment and a brief explanation of it.

4) Unpaid Collection: A collection on a credit report is not a good thing, but can still be written in a standard market if the collection is paid. An unpaid collection will immediately put an applicant into a high risk bond program.

5) Late Child Support: With out a doubt, unpaid child support is the worst item an underwriter can see. If an owner has late child support showing on their report they might as well start looking for bond alternatives. Not even high risk bond programs will write a bond for someone with late child support.

Of course, credit scores still count as well. Most bonding companies will be looking for credit scores of 670 or higher. However, some sureties have more liberal underwriting guidelines for low risk classes of business. Some sureties will base their decision on the owner that is considered the highest risk, while other bonding companies will average the credit scores of the owners.

Bond Form: The bond form is exactly what it sounds like, a form used to create a bond. The bond form contains the specifics of what the bond is guaranteeing. Therefore, bonding companies are careful as to what they are willing to write. Some classes of business are considered riskier than others (i.e. ICC Freight Brokers, Wage & Welfare, etc.). Sometimes a line of business is considered less risky, but the bond forms language is considered a higher risk. There are two clauses bonding companies will typically look for:

1) Cancellation Clause: A cancellation clause allows the surety to cancel a bond. An example read as follows, “The surety may cancel this bond and be relieved of further liability hereunder by giving 30 days’ written notice to the principal and the [obligee]‿.

2) Aggregate Clause: This clause creates a cap to the aggregate amount of claims. In other words, a $50,000 bond can pay out no more than $50,000 on a single claim or multiple claims. Therefore, if the bond pays out $50,000 on a claim, then it is maxed out and will not pay out on any additional claims. An example of the clause would be, “In no event shall the aggregate liability of the surety exceed the penal sum specified herein.‿.

For most bonding companies, a bond form missing the proper language will result in an immediate declination regardless of who the applicant is.

As you can see, a bonding company reviews a multitude of information prior to approving a bond. A good agent knows not to quote or even give a ball park quote based on a credit score alone, as it will likely be very inaccurate. In the next installment of this two piece series we will go over what a principal can do to be considered less of a risk and obtain the lowest bond rate the bonding company has to offer.

Thanksgiving Vacation Comes Early For Most Bond Producers

According to several agents and underwriters throughout the country, the majority of bond agencies are hearing their phones ring less and less as we approach Thanksgiving vacation. I can’t quite say the same is true for JW Surety Bonds; we are busy as ever due to our unique surety programs.

I was planning on writing an article on how to obtain the lowest surety rates, but unfortunately I may not have time until after the holidays due to a last minute rush by many of our clients to obtain their bonds prior to stuffing themselves with turkey! More articles are soon to come, but our current clients needs always come first so you’ll have to come back to read more after Thanksgiving.

Surety Bonds Cleaning Up House

Manufactured homes are about to make a comeback in a big way. Due to the current housing market many young people can not afford to buy a site-built house. The recent hurricanes will also give the industry a good boost in sales, as people are looking for affordable housing that can be moved into as soon as possible.

Surety bonds are helping to keep the manufactured housing market regulated. The state of South Carolina raised their bond requirement from $15,000 to $30,000. Currently, one in five homes in South Carolina are manufactured housing. David Bennett, an administrator of the Manufactured Housing Board stated, “You just can’t get into this business on a shoestring”, “A little more regulation is good for the customer.”. Trey Ledbetter, a co-owner of Ledbetter Housing Center, a manufactured home dealer said, “Only your real professionals are left,”. The number of dealers in the state has dropped from roughly 800 in the late 1990s to about 125 today.

Without government regulation and a surety bond requirement, fly by night companies would no longer be a rarity, leaving countless families with tremendous financial losses. If a manufactured home company is negligent, the bond claim will help to ensure some compensation to the home buyer. A little regulation goes along way with the current boom in manufactured housing. A booming market is ripe for unqualified entrepreneurs attempting to succeed in industries they know little to nothing about. It is a good thing instruments like surety bonds exist to clean up house on industries in need.

Is It Safe To Purchase A Surety Bond Online?

Every day technology is making its way further into our daily lives. Internet sales are increasing globally with every passing year. Many Internet surfers are still wary of making purchases online, especially when they must divulge personal information such as social security numbers.

Often, our agency is asked if our online applications are safe; I can say with 100% certainty, yes! We make use of the industry standard VeriSign, which submits all applications in 128-bit encryption codes. The encryption is the strongest available and has never been broken. In fact, 93% of fortune 500 companies make use of the same technology.

I wish I could say that applying for a surety bond is safe with any agency. Unfortunately, the fact of the matter is, that it is simply not true. I have stumbled upon many bonding agency or insurance agency sites that do not take any security measures. It is not that the surety bond and insurance industries are particularly careless, you will see these trends in a variety of different businesses. I am disappointed that the insurance industry is not more careful with how personal the information they require actually is.

There are precautions any web surfer can take to ensure their own online safety. Web browsers will tell you if a site is making use of encryption with a small padlock icon at the bottom of the browser. If it is open, there is no protection at all. If it is closed they are taking measures to make your online experience more secure. Don’t be fooled though, a closed padlock does not always mean that it is secured by 128-bit encryption, as there are lesser grades of encryption being used online as well.

A social security number, personal financial information, etc. is nothing that you want falling into the wrong hands. Prior to doing any online shopping, do some research; it will save you from tremendous headaches in the future.

You can feel safe applying through JW Bond Consultants, Inc. Our online surety bond applications are always secured using 128-bit encryption.

Surety Bond Myths

Surety bonds are often misunderstood. For many, all they know about them is that they are an expense required to legally operate their business. There are many common misconceptions when it comes to suretyship, but lets review what a surety bond is prior to going over bond falsities.

A surety bond is a three party guarantee. The three parties are the principal (the person or entity required to obtain the bond), the obligee (whoever is requiring the bond of the principal), and the surety (the carrier backing the bond). A bond should be thought of as credit, not an insurance product for the principal. In the event of a valid claim, the surety will pay the obligee a specified amount and look to the principal for compensation for the claim. The principal pays an annual premium for the financial strength of the surety to write the guarantee rather than obtaining a letter of credit and tying up capital. You can read more about surety bonding in our Bond Information Section.

Now that we have an idea of what a surety bond is, lets begin with our myths of suretyship!

    1) “I have never had a claim, I should get a bond at a great rate.” While the surety will be happy to hear you have never had a claim, it is not a selling point. Bonds are underwritten quite differently than regular insurance. When it comes to insurance, losses are expected. However, bonds are underwritten with the expectation of no losses. Therefore, if you ever trigger a claim, it is likely you will never obtain bonding again.

    2) Premium will be reduced the longer a principal stays with a bonding company. False, surety bond rates rarely change unless the principal’s situation changes. Bonding companies have to file underwriting guidelines to each state they do business in so they can not discriminate. The rate filings are tedious and costly job and do not change often. Therefore, unless the principal’s situation changes (ie business financials, owner(s) personal credit, etc.), the rate will not change often.

    3) You need to pay the full amount of the bond. Wrong again. Some people assume that surety bonds must be paid in full in order to obtain a bond, which is simply not true. While some bonds will require 100% collateral for higher risk cases, most will simply pay an annual premium which is a percentage of the total bond amount.

    4) The principal is the beneficiary in the event of a claim. Sorry, but this could not be farther from the truth. As we learned earlier, the obligee is the beneficiary and the principal will have to pay the surety any funds paid out plus attorney fees.

    5) “That’s too much! A $50,000 auto dealer bond only costs $250 year.” Anyone that has been in the surety bond industry for a couple years knows that rates have drastically changed due to historic surety losses around the turn of the millennium. Bonding companies have since changed their underwriting guidelines and have become much more conservative. The soft bond market is a thing of the past and so are ridiculously low rates.

There many other surety bond myths out there. Above are the misconceptions our agency most commonly hears. We do our best to educate our clients so they can feel more confident with the process of obtaining a bond. Feel free to post a comment if you have any questions or would like to add a common myth to our list.

Are Too Many Credit Inquiries Increasing Your Bond Premium?

Personal credit is not the only factor used for surety bond underwriting. However, red flags on a credit report can make a rate sky rocket or in severe cases cause a declination. Red flags consist of bankruptcies, tax liens, collections, civil judgments, and low credit scores. The scoring system used by the credit bureau are complex algorithms that determine a persons individual score.

Having your credit pulled can lower your score. A credit inquiry that will lower a score is called a “hard credit report”, which can lower a score as much as 5 points per inquiry. A “soft credit report” does not count as inquiry and does not lower credit scores. Insurance related businesses, such as bonding companies and bond agencies are permitted make use of soft credit inquiries.

In my last article, “What Makes A Good Surety Bond Producer?”, I discussed how a good bond producer will be mindful of the principal’s personal credit. A great way to do so is by making use of soft credit inquires so credit is not negatively affected. A bond producer that shotguns applications to every bonding company and broker they know could drastically lower the principal’s personal credit.

The best example of the devastating effects of hard credit reports can be seen on mortgage brokers’ credit reports. They often have a long list of inquiries, which can make even the highest of scores plummet. What can be done to fix this problem? Unfortunately, not much since the brokers need the banks to run their business. However, I do have some good news for the brokers out there. A window is created, in which additional inquires do not count for 14 days when a hard credit report is pulled. The only thing that can be done is to try to time the credit pulls of the banks at the same time so you do not get too many hard credit report inquires that effect credit. Try setting up all of your banks at the same time rather than stringing them out over time.

Our agency always does anything possible to keep the credit scores of our clients up! The majority of our applications are done on soft credit reports only, and therefore credit is not effected whatsoever. A bond producer that does not know their markets could drastically effect the personal credit of all owners. Be careful with your credit, the time spent planning will save you hand over fist in the long end.