Being a business owner in the construction industry as a contractor comes with a handful of obligations and responsibilities. Not only are there commitments you must keep to ensure your customers and clients remain happy, but you also have legal and regulatory requirements to meet. One of these requirements is the need for a surety bond as a licensed construction contractor. A surety bond protects the job owner on a construction project from losses incurred when a project is not completed as agreed or in line with industry best practices and regulations. Each state, county, or city has its own guidelines as to the type of bond required, but in most cases, a surety bond is a normal part of doing business.
However, not all contractors have an easy time securing a new surety bond. This often boils down to cost. The price of a surety bond is impacted by personal and business credit since the surety agency reviews these factors in determining if a bond is available or not. When credit is not in the best shape, you may pay a higher price for a bond or be denied altogether.
Fortunately, there are ways to improve your chances of getting the surety bond you need as a construction contractor, even when your credit is not ideal. Here are a few things to consider.
Know Your Credit History
Licensed construction contractors may not think they need to worry about their personal credit history when starting a new project for a customer; however, this could not be further from the truth. Surety agencies take a close look at your credit history and score to determine how much of a risk you present as a bondholder. One of the first steps you can take to ensure you are eligible to get a bond is to check your credit before applying.
Pulling your credit reports from the three major credit bureaus – Equifax, Experian, and TransUnion – provides a detailed view of your financial activities, past and present. With each report, information about previous employment history, address history, credit cards, loans, and mortgages is included. In addition, specifics of negative items, such as collection accounts, bankruptcies, court judgments, or late payments are on display. The more negative data included in your report, the higher risk you present to a new creditor like a surety agency. While you may think hiding your head in the sand is a good idea, it is important to know what lurks in your credit report so you can take steps to correct it.
Correct What You Can
The good news is that bad credit history is not a life sentence. Some significant negative items naturally fall off your credit report after a set number of years. This is helpful in boosting your overall credit profile. However, credit reporting agencies often make mistakes that can drag down your credit report. After pulling your credit, identify if there are any erroneous entries that can be disputed, and follow the dispute process with each of the credit bureaus. This process takes time, but it can be incredibly beneficial in cleaning up your credit report before it is viewed by a surety agency.
Build Good Habits
The next best thing you can do to ensure you are able to get a surety bond when you need it is to work on establishing good financial habits. On the personal side of the line, strong credit habits include paying off credit card balances and loan payments on time and as agreed. It also means being diligent about keeping credit usage down below 30% of your available credit lines.
From a business perspective, having organized financial statements, including your balance sheet, cash flow, and other outstanding debt agreements, can make a world of difference in presenting yourself as a suitable risk for a new bond. Taking the time to build these habits early on shows a surety agency you are ready to take on the responsibility of a bond for your business.
Work with the Right Agency
Finally, it is crucial to work with the right surety agency if you have bad credit and need a surety bond for your construction contracting business. A good surety company will work with you to determine what you qualify for and which bond is best fit for your business and budgetary needs. It is important to note that the price of a surety bond is based on the amount of bond plus your credit history. A good surety agency will walk you through available options based on these factors to help get you the bond necessary to operate your business.
Surety bonds are a required part of running a successful business for most construction contractors. However, getting a bond is not always a simple feat. If you have bad credit, follow the steps above to ensure you are in the best possible position to get an affordable bond both now and in the future.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.