The Evolution of Credit-Based Bonding Programs

Author, Andy Roberts, Surety Group Leader, Rancho Mesa Insurance Services, Inc.

When I first started in the industry, 8+ years ago, there were a handful of surety companies that offered credit based surety programs. They required a one-page application, would do a soft pull on the owners credit, and so long as it was sufficient, they could qualify for up to $400,000 in single and aggregate bonding limits. Since then, the limits in these programs have continued to grow as the market for the credit-based programs has evolved.     

From that $400,000 limit, we saw these programs jump to $750,000 single and aggregate, then it went to a $1,000,000 single and aggregate. Now we have surety companies that are offering $3,000,000 single and aggregate limits based on the personal creditworthiness of the owners. Just as before, there is no need for the contractor to provide company financials. The contractor would need to fill out an application and depending on the strength of their credit they could qualify for up to $3,000,000 in bonding. However, there is one caveat. The limits in these programs are also based on the contractor’s largest completed project, with surety companies offering a single bond limit at two times their largest project size. This is a significant development in the industry that is being driven by a few different factors.

First, sureties have become increasingly more comfortable with the idea that if owners pay their bills personally they are likely to operate their businesses in the same fashion. The increased comfort level stems from the fact that these programs have performed well from a loss perspective. Second, there is a lot of competition in the surety marketplace, especially in California, and this is driving companies to develop programs that will attract quality contractors earlier than previously. Finally, inflation is a significant factor. A project that was $1,000,000 a few years ago may now very well be close to $2,000,000 now. The scope is the same, but labor and material costs have increased substantially, and sureties need to increase their limits to keep pace. 

We often talk about how very little changes within the surety industry, but that is not the case with credit-based bonding programs. This part of the industry has changed a lot and is continuing to evolve creating more opportunities than ever for contractors to get access to bonding. This makes it important to work with a surety agent that understands all the different markets, and can help identity the program that best fits your company’s goals.

For more information on credit-based bonding programs, contact me at aroberts@ranchomesa.com or (619) 937-0166.   

Transitioning from a Credit-Based to a Standard Surety Program

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

When sureties began offering credit-based programs, there were only a few surety companies who would offer this type of program and the limits were low, most often around $250,000 for a single project and aggregate. However, over the past few years, there has been an increase in the number of surety companies that are willing to offer these types of programs. The limits offered have also increased with some companies writing $1,000,000 for a single project and aggregate bond based solely on an owner's personal credit score. These programs are great for contractors that are getting started with bonded work, or don’t bond frequently and are not looking to provide the information necessary to set up a standard program. However, for contractors looking to grow and need additional surety capacity in order to achieve that goal, they should be aware of the steps that will need to be taken in order to transition from the credit-based program to a standard bond program. The first, and most important step will be the company financials.

Standard bond programs are written primarily based on the financial strength of the company. Sureties will be looking to obtain the last two fiscal year-end financial statements, balance sheet and income statement, and the most recent interim balance sheet and income statement that are available. They will evaluate the current cash position, working capital, and equity in the company to determine a single and aggregate bond limit.

In addition to the company financials, the surety will want to evaluate the personal financial statements for all the owners. Personal financial statements are an important item that surety companies will evaluate. Similar to the corporate financials, assets and liabilities will be evaluated along with the personal credit of the owners. Surety companies want to ensure that the company owners are current with their personal obligations before providing surety credit to their company. 

Another important item that a surety underwriter will want to review before providing a standard surety program, is a current work in progress schedule. Being able to provide a current and accurate work in progress (WIP) schedule will be a requirement from a surety underwriter. The WIP monitors project progress and performance over time, and plays a critical role in determining the maximum amount of bonded work that a contractor can take on at one time.     

While these are just a few things that surety underwriters will be wanting to evaluate in order to set up a standard bond program. There are other items that contractors can consider, like hiring a CPA for their year-end financial statements and getting a bank line of credit. 

For contractors that are looking to graduate from a credit-based program, increase their current surety capacity, and want to explore further strategies that can strengthen their bonding program, contact me at (619) 937-0165 or via email at aroberts@ranchomesa.com.

How Credit-Based Bond Programs Benefit New Contractors

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

For small or new contractors that are looking to break into the world of government contract work, the process of getting a surety bond program in place can seem like an onerous one. It requires the contractor to compile a lot of paperwork and detailed financial reports, which can be a daunting task for any contractor, regardless of size or experience. However, there are now several “A” rated sureties that provide credit-based programs for writing smaller bonds.

The owner or owners will provide their financial information via a one or two page application, often referred to as a “fast track application.” These let you and your company apply for smaller bonds, usually $500,000 or less, depending on the surety, without requiring all the typical underwriting information that is needed to put together a formal surety program. And, so long as the owner(s) credit is good, the surety will approve the bond(s) to be issued.

These programs are great for contractors that don’t bond very often or contractors that are just starting to bid on bonded jobs. In addition, these programs also provide the contractor an opportunity to begin a relationship with a surety company, which will be very beneficial as the contractor grows and begins to bid larger bonded jobs that fall outside of the credit program, and will require a formal program with the surety.

If you have additional questions or would like to explore all the different options that each surety offers, please contact Rancho Mesa Insurance Services, Inc. at (619) 937-0166.