Personal credit is one of the greatest factors for deciding if a bond is declined or approved and at what rate (for commercial and small contract bonds). This is the case whether the company is a proprietorship or corporation, but why? A credit report is a detailed summary of how financially responsible you are. Therefore, it is used almost everything an underwriter is determining if your company is a risk they would like to take. Typically contract bonds under $100,000 are written strictly on personal credit. Contract bonds over $100,000 are written based upon personal credit and business financials. Commercial bonds are usually based on personal credit for bonds $50,000 and under, business financials are usually required for anything over $50,000 (sometimes less depending on the bond type).
As recent as a few years back, personal credit was not checked when applying for a surety bond. Sureties became much more cautious with who they wrote bonds for due to substantial losses throughout the industry. It may someday change back to the soft market of years prior, but I would not count on it being anytime soon.
What options do you have in today’s conservative market? To be honest, not many…If you are looking for a contract bond and have bad personal credit, then you are out of luck. No surety will write any type of contract bond with poor personal credit. (contract bonds include: performance bond, bid bond, payment bond, etc.) If you are in the market for a commercial bond then you have some options available. (commercial bonds include: license and permit bond, mortgage broker bond, auto dealer bond, etc.)
One option would be to post the money. Sometimes you will be permitted to put up the full amount of the bond. The government department or private entity requiring the bond holds on to the funds while the bond is in effect. The disadvantages to this option are obvious, most applicants simply do not have that kind of money to put up. If you do have the funds available there are other down falls that may make you think twice. The funds usually do not earn any interest; the amount that could have been made in conservative investing could pay for a large portion of the bond. Posting the money also makes the balance sheet of a company look much weaker then it actually is. The most frightening factor of posting the money is if a claim occurs. In the event of a claim, the obligee (the government or private entity requiring the bond in the first place) will have the right to disperse the funds as they see fit. I seriously doubt they would do much, if any investigating on the manner, it is much easier for them to spend your money.
Depending on the bond type, you may be able to find a bad credit bond program that will write the bond for a very high premium (typically about 10 times higher then a standard market) and 10% cash collateral. This may seem outrageous, but it still may be your best option.
Depending on the industry you are you may be able to obtain the bond in a high premium standard market. Mortgage banker bonds and mortgage broker bonds generally have low claim rates. This allows sureties to offer high rates then you would get with good credit, but far less then a bad credit bond program. Currently, these high premium standard markets are not common and you may have to do some searching. Any good agency will keep on top of the market to offer their clients the best rates. JW Bond Consultants, Inc. (my agency) represents over 15 sureties and can place almost any bond type, even the most difficult situations.
In the end, if you have bad personal credit, you are not going to be happy with the current bond markets. For now, you will have to bite the bullet and take one of the options discussed earlier in this article. The market is cyclical and will one day be less conservative again, but not anytime soon. In the mean time, I suggest going to a credit repair agency and getting your credit score up for next year’s bond renewal.