What Do Surety Companies Look For?
Upon receiving an application for a bond, a surety company assesses the application and determines whether the business is credible enough to be granted a bond.
Some criteria that surety firms consider are:
- The business's financial health
A business's financial health and stability are crucial factors for a surety company to consider. Therefore, when completing your application for a surety bond, keep in mind that you should improve the financial stability of your company by lowering debt, maintaining consistent income statements, and keeping an eye on receivables. Make sure there is enough cash flow and have enough working capital.
A credit check is usually the first step when securing a surety bond. Surety companies will use your credit score to understand your creditworthiness and charge you a premium accordingly. For example, a company or business with a good credit score will often be charged a lower premium than a company with an average credit score.
Credit score checks can be intimidating and unforgiving, but don't fret! There are ways to secure a surety bond, whether you have good or not-so-good credit.
- Experience in the Business
Another critical and relatively strong indicator of a trustworthy business is the ability to fulfil obligations and complete a project. This will increase the likelihood of receiving a surety bond.
Here are a few things that surety companies assess to confirm that a business or enterprise is experienced enough in the segment in which they are operating:
- A demonstrated history/track record for completing projects on time shows a contractor’s competence and reliability.
- If a business or contractor has experience in the industry, it helps them understand the unique challenges and requirements that may arise. This may reduce the risk of delays and subsequent increased costs.
- An experienced contractor typically has a better-organised team and more efficient management practices, both of which are essential for project success.
- Claims History
A business or contractor who has successfully completed projects using surety bonds is more likely to be favoured by surety companies during the application process. A good claims history shows the credibility of the business and the contractor, helping them secure bonds at attractive premiums.
Steps to Strengthen Your Application
If you are aspiring to secure a surety bond and want it rather quickly, you must build a strong application and add supporting documents to demonstrate your business’s financial stability and reliability.
We have compiled some effective strategies to help you strengthen your application and secure the necessary surety bond.
1. Boost Your Credit Score
Is there a guaranteed way to boost your credit score? Not really!
But here are a few ways that you can use to improve your credit score.
- Pay bills and debts on time
Since your payment and debt history are used to calculate your credit score, paying bills and clearing debts on time can boost your credit score.
- Improve debt-to-income ratio
Repaying any outstanding debts and keeping the debt-to-income ratio to a minimum can improve your credit score. It also reduces your liabilities and improves your financial stability.
- Check credit report errors (if any)
Always check your credit score regularly and report if there are any errors, as they can affect your credit report. In the case of any discrepancy, report a dispute immediately.
2. Strengthen Your Business Finances
Once you have improved your credit score, tightening your business finances should be the next thing on your to-do list. Here are a few things that can help!
- Maintain healthy cash flow and sufficient working capital
Track your income and expenses regularly and ensure you have enough liquid cash to cover the costs of a project at hand. You can incentivise your customers to pay early by offering them a discount. Doing so gives them a reason to pay faster and gives your business more liquidity.
- Maintain proper financial records
The surety company will review your business's financial records during the application process to understand its stability. So, to improve your chances of approval, organise your balance sheet, update profit-loss statements, and maintain key documents that demonstrate your business’s reliability.
- Reduce excessive liabilities
Liabilities are red flags, especially for businesses trying to secure a bond. Having excess liabilities reduces the chances of securing a surety bond. But you can strengthen your application and financial health by minimising debt.
Building financial strength demonstrates your business's long-term credibility, improving the chances of getting a surety bond.
3. Choose the Right Surety Bond Provider
An essential step in getting a surety bond is selecting the right provider. Selecting the right surety bond provider makes the approval process smooth and tailored to your needs. Look for companies that have good online reviews or are recommended by reliable sources.
- Choose a surety company that specialises in your industry. They will be able to offer you better support and guidance.
- Look for surety companies that offer lenient terms for lower credit scores. This will increase the chances of your surety bond application being approved.
Overall, partnering with the right surety bond provider ensures a seamless experience.
4. Maintain Transparency and Provide Complete Documentation
When applying for a surety bond, you must always verify that your application is clear and honest so that it builds trust with the bond provider.
- Provide accurate and up-to-date financial statements, tax returns and licences.
- Disclose any financial issues your business has gone through and explain any setbacks it may have faced.
- Transparency shows responsibility and adds to your application's credibility, increasing the chances of approval.
5. Offer Collateral or an Indemnitor
If your financial statements are not strong enough, or you have a bad credit score, don't worry! Some surety bond providers require additional documentation and security in the form of collateral or adding a co-signer to strengthen your application.
What to Do if You are Denied a Surety Bond?
Despite your best efforts, your surety bond application may be denied. But it's not the end of the world. Here's how you can go about a roadblock like this!
- Ask why your application was denied
Examine the letter of denial for specific reasons, such as poor credit history, insufficient collateral, or a high-risk business profile.
If you disagree with the given reason or need more clarity about the response, do not hesitate to contact the surety company. When talking to the surety bond company, feel free to ask more about how you can improve the chances of bond approval.
- Work on your credit and reapply later
Based on why your application was rejected, work on the shortcomings of your application and reapply later. Here are a few things you can do:
- Improve your credit score.
- Provide additional assets or financial resources as additional collateral to meet the surety company's requirements.
- If your application was denied due to a weak business profile, work on financial stability and past performance before reapplying.
- Look for high-risk surety providers
Sometimes, you may need to opt for companies that consider high-risk businesses but offer high premiums to secure bonds.
Conclusion
A key step in securing surety bonds is filling in their application. When it comes to assessment, the surety companies evaluate several parameters to determine if your business is high or low risk. It is important to give a bond and determine the premium that the business needs to pay. So, strengthen your finances, organise key documents, and explore collateral options to boost your approval chances. Taking proactive steps now ensures a smoother application process and long-term business stability. Get started today and set your business up for success.
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