Surety bonds are a necessary component in running a legitimate, successful, and reputable business in several different industries. From auto dealers and mortgage brokers to construction contractors, having a surety bond in place means you have taken steps toward protecting your business and your customers. However, getting a surety bond represents a cost to the business, ranging widely from one type of bond to the next. Several factors play a role in how much your surety bond will cost, including your credit history, your business track record, and your previous bond claims.
Understanding these driving forces behind surety bond costs helps you keep a lid on this often necessary expense both now and in the future.
Know Your Credit History
A surety bond is a form of credit extended to you as an industry professional or business owner. The surety agency providing your bond essentially promises to pay for claims made against your business, but unlike insurance, you repay the claim amount over time. Because of this structure, surety bonds can be expensive for those with a less than perfect credit history or a low credit score.
Your first step in lowering the cost of a surety bond is to know where you stand from a personal credit perspective. If you have negative marks, like bankruptcies, court judgments or liens, or several missed payments, the cost of your surety bond will be higher. Check your credit before applying for a new bond so you can see exactly where you stand.
Develop Good Financial Habits
After you have determined your credit standing, you should work diligently to improve your personal credit with sound financial habits. This means keeping your credit utilization across credit cards and loan down to no more than 30% of your available credit. It also requires you make on-time payments for all your debts. If you have creditors waiting in the wings for payment, work with them to get on a payment plan or pay off your balance in full before applying for a surety bond. These steps to improve your credit can drastically reduce the price of your bond.
Have Business Records Organized
In addition to having a handle on your personal credit, you will also want to take time to organize your business financials. Whether you have been in business for an extended period or you are just getting started, surety agencies want to know that you have your financial ducks in a row. This involves having accurate and up-to-date documentation, including income statements, balance sheets, and cash flow statements for your business operations. Even when your personal credit is not in its best shape, surety agencies are more likely to work with you when you can show you have a firm grip on what’s happening in your business from a financial perspective.
Keep Claims to a Minimum
Another factor that can and will drive up the cost of a surety bond is claim history. If a business has several previous claims against a bond for fraudulent work, misrepresentation, or failure to perform as agreed, a surety agency will think twice about providing a new, affordable bond. To ensure you are not facing an uphill battle with surety bond pricing in the future, be sure the projects or work you take on are within your capability to complete.
Increase Liquid Assets
One of the lesser known methods for reducing the cost of a surety bond is to improve business liquidity. This means increasing the amount of money the business has on hand, less any liabilities that may be outstanding. To boost liquidity, businesses can collect on outstanding debts before applying for a new bond, or increase working capital through credit lines or other measures before asking for a bond. Surety agencies view a business with a strong liquidity ratio as one that can pay for its debts or emergency expenses should they arise.
Strengthen Industry Experience
Another step businesses can take to reduce their surety bond price is to have a strong reputation in the industry. Experience completing projects or jobs for customers, without bond claims, helps give surety agencies peace of mind that the business can and will operate up to industry standards. Having a large business network, customer reviews, and vendor or suppliers willing to vouch for your company or work can have a big impact on your surety bond cost.
Be Selective with Your Surety Agency
Finally, getting the most affordable surety bond comes down to working with the right surety agency. Not all surety companies handle the same types of surety bonds, nor do they all work with several different bond providers that specialize in certain business circumstances, like poor credit. The surety agency you choose should be willing to review all of the information related to your personal and business history, as well as provide several different options for getting the bond you need at a price that fits within the budget.
Taking one or more of these steps before applying for a new surety bond ensures you are on the path toward getting the protection you or your customers need without breaking the bank.
