In the first part of this article, we reviewed what bonding companies typically look at when reviewing an applicant. In this installment, we will talk about what you can do to better your situation to become less of a risk and in turn lower your bond premium.
General Bond Application: For the most part, there is little you can do to lower your rate or increase your chances of approval when it comes to the bond application. You will want to complete this form as completely and accurately as possible. If any information is left blank, the approval will be delayed.
Business Financial Statement: Your business financial statements are usually the most heavily weighted item when a surety underwrites a bond. There are a number of things you can do when preparing your year end business financial statement to make it the most attractive to a surety company. For one thing, utilizing the services of a Certified Public Accountant will give your financials more credibility (In-house financials are accepted for smaller bond amounts, but may not get you the lowest rate). Often, the figures on your balance sheet are only as strong as the individual that prepares them. You want a very clean and clear presentation of your business and it’s financial picture. Bonding companies prefer statements prepared on an accrual basis, with full notes and disclosures. The accrual method gives the underwriter the best picture of your company’s financial strength.
There are several important elements a surety will want to review within your business financial statement. These elements all should be maximized as much as possible to ensure the greatest amount of suretyship allowed to you and your company:
1) Working Capital: This is the quick equation of all of the current assets subtracted by all the current Liabilities. This gives a rough working capital position which indicates the business’s ability to pay bills and shows a snapshot of the liquidity of the entity. This is where most companies struggle, and is also where most sureties will look for a weak spot. You can keep your working capital strong by staying on top of your accounts receivable, thus making them cash. In addition, making sure that payables are taken care of and most importantly that there are not any unnecessary inter-company loans.
2) Limiting Shareholder/Employee Loans: This seems like a nice way to lend either yourself money, or employees in some instances however, what you do not know is that surety companies look very unfavorably upon these receivables. If an underwriter sees an account receivable in the amount of $XX,XXX – that figure is immediately discounted in it’s entirety. The reason for this is quite obvious, the company may never see that receivable back from the officer, in fact many times it simply keep growing. Thus making an unrealistic account receivable account.
3) Owners Equity Draws: The biggest evil is the fiscal year end owner draw of capital. This needs to be balanced out delicately. If your company is thriving and you are able to pull sums of money for yourself at year end, you need to ask yourself, “How can this affect my surety bond(s)?”. It is always wise to speak to your bond agent about equity draws at year end as many bonding companies require a minimum about of equity in your company depending on how much bonded liability you have. In a perfect world, a surety would like to see a customer add to his corporate balance sheet year after year. Even if it is small gains year after year.
In short, there are many other items that can affect your companies eligibility for bonds and suretyship. These tricks to the trade mentioned above are a great start to keeping you and your company on track in the strange world of surety bonds.
Resume: If the surety is requiring a resume of the owner(s), be sure to make it as professional looking as possible. Do not submit a hand written fax that has limited information. The more confidant you can make the underwriter, the more likely you will obtain an approval at a lower rate.
Personal Financial Statement: Just like everything else on your bond applications, the personal financial statement should be accurate. Do not inflate numbers, as bonding companies will verify information from time to time. If they find any inaccurate or false information they will more than likely decline you for lack of trust. Keep in mind the surety is being paid to guarantee the performance of your business, so they need to feel confidant in doing so. Bonding companies are always more comfortable writing bonds for principals with home ownership. If you have the money are currently renting, your bond premium is another good reason to own a home rather than rent.
Personal Credit: Credit report flaws are the most common culprit for a principal being put into a high risk program. Fortunately, many of the problems can be resolved rather quickly. However, for some issues only time or new ownership can alleviate the situation.
1) Bankruptcy: A principal is stuck in a high risk program if a bankruptcy is not discharged for 7 years or more. The only way to lower the rate is to either wait it out or change the ownership of the company. Just be sure the new owner has a flawless credit report if you go through all of the trouble of changing the ownership.
2) Tax Lien: An unpaid tax lien is just about as bad as a bankruptcy. If the tax lien is paid over 3 years ago a few sureties will consider you for a standard program. Most will consider an applicant for a standard program after the lien is 7 years old (if paid). Once again to get out of a high risk program, the only options will be to wait for time to pass or change the ownership.
3) Civil Judgment: If the judgment is not satisfied, a surety will place the applicant in the same program that someone with a bankruptcy would be in. A principal with a satisfied civil judgment will still be written in a standard market by some bonding companies, depending on the circumstances. If you know you have a judgment on your credit report, include a description of what happened; it could keep you in a standard market.
4) Unpaid Collection: An unpaid collection could put an applicant in the same high risk program someone with a bankruptcy would fall under. Fortunately, if a collection is paid the principal is in good shape again. Most bonding companies will except a letter stating the collection is satisfied from the collection agency or entity the money is owed to. If you have an unpaid collection, pay it, it could save you thousands on your bond premium.
5) Late Child Support: Without a doubt, late child support is the worst item a surety can see on a credit report. High risk programs won’t even touch these applicants. Bonding companies do not want to guarantee businesses if the owner(s) refuse to or can not support their own children. There is little one can do in this situation short of resolving the child support issues and moving on from there.
Credit scores can be raised rather quickly for some. Your score will be lowered if your available credit is low, meaning you are making use of your credit. Paying off credit cards and other forms of credit can quickly raise a score a great amount. Credit inquires should be kept to a minimum, as too many can also lower a score. Most bonding companies want to see scores over 650, with lower rates that go down as scores increase. Therefore, you will want to do everything you can to get your score as high as possible.
Bond Form: Unfortunately, there is a little one can do to resolve the problem of a risky bond form (See part 1 of 2 of this article for what makes a risky bond form). Obligees will rarely allow any changes to their forms. However, obligees will revise their bond forms from time to time and have language added that is agreeable to sureties. If you are required to obtain a bond with risky language, you should complain to the obligee, as your bond is probably costing you more than it should.
An applicant must meet all of the above criteria in order to obtain the lowest rate. An applicant may fall into a high risk program if any single owner of a company does not meet the underwriting guidelines as described above. Do what you can to become less of a risk, as the commercial surety bond market does not have much of a middle ground when it comes to rates; applicants are generally either in the 1-3% category or 15%, quite a large difference.