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.