Each bonding company will set guidelines for qualification and many bonding companies have varied methods of determining if you qualify. Most of all, they agree that the applicant must be reputable and have a good record of performance. After all, a surety bond is a guarantee of performance! If a surety is willing to back up a contractor, they must be certain that the risk is minimal. The underwriters’ primary mission is to provide a guarantee of reliable service. The evaluation from any bonding company consists of four components: financial stability, integrity, longevity and capacity, which we will further discuss (this is especially true for construction bonds).
While this is considered the biggest component, if all other components are favorable, this should be easy to attain. Sureties are looking for financial statements to picture how your business operates. The statements must be well organized, preferably by a Certified Public Accountant (CPA) and clearly defined. Aging should be 90 days on the average and a good cash flow is required. Your credit history will be evaluated along with the history you have with your vendors and subcontractors. You must have a good relationship with your banker as well. These criteria and your capitol assets will determine your net worth.
You must show that you are respected in your industry and are worthy of obtaining a surety bond. Your business contacts must give you high recommendations to prove that you are in good character. Contacts such as customers, suppliers and even employees play a vital role in evaluating your company’s integrity. A bonding company must place their faith in you; and satisfying their concerns of your reputation is required prior to writing your bond.
Organization is a key element when assuring the integrity of your company. Any well-run business also is very organized from entry-level personnel to chief officers. Record keeping, management, accounting and account management will be evaluated as part of this process.
A surety obviously wants to see that you have been in business for a long time. What is more important are the mechanics of how you have survived thus far. How long have your managers and foremen been in tact? What kind of employment turn over do you have? Is it above or below the industrial average? What is your business plan? What details (employee stock options, retirement, investments) do you have to back up your plan? Will your company continue to perform after you leave? Basically, if you can provide evidence that your company will still be around after you die or retire, the bonding company is satisfied.
A smart business knows his or her limitations. Steady growth is positively a key element to the success of your company. A surety is keen to observe the “too much; too fast” syndrome. If the surety notices that you have taken on more work than you are capable, they will become nervous and may decline your bond application. If you are profitable and can stay the course of your business plan, the bonding company will notice that you have good discipline and are not “greedy” in your method of doing business. If you are considering expanding, be cautious about spending beyond your means, as this could be disastrous not only to your qualification but your business as a whole.
If a surety is satisfied after evaluation of these components, they will decide not only if you qualify but also for what dollar amount. You may be approved with limitations depending on the outcome of your evaluation however; some bonding companies will either approve or decline your bond amount for which you applied. There are circumstances where the surety will suggest bonding for a specific job as opposed to your company as an entity if they feel a high risk is involved. This will keep your premiums to a minimum until you are capable of obtaining larger bonds. After you prove your worth, they may extend or add more bonding capacity to your account. Keep in mind, it’s crucial that you work with an expert in the surety industry. Learn more about how to ensure you choose the proper bond company. You can take a look at the most frequent surety bond related questions. Lastly, if you would like to learn more about what surety bonds are and how they work, you can read our detailed guide here.