Many contractors are wary or unsure of how to create a bonding program or obtain their first surety bonds. The process can actually be quite simple, and best of all, there is no cost to get started.
The first step involves understanding your personal credit score. All owners with more than a 10% stake, and their spouses, will have their credit checked (a soft pull) by the surety underwriter. If the scores are over 700 FICO, and there are no bankruptcies or tax liens, you can generally qualify for bonds up to $500,000.
You can quickly check your score using most bank mobile apps. If your score is below 700, you can pull your full report for free via www.fico.com, and review any negative entries. Depending on the credit agency (most sureties use Experian), you can file a dispute letter for any mistakes or discrepancies that may be driving down your score.
Otherwise, continue to practice good credit habits, like paying down debt on time each month, and avoiding too many hard credit inquiries.
Did you know, your company has a credit score too? A great starting point to building this score is to obtain a credit card under your company’s name and use it and pay it off monthly. This is also an easy way to accumulate cash back or travel rewards through the card’s points system.
Once the company has an established credit record, and when the owners’ scores are above 700, have a surety agent provide a short-form application. These applications have different names, such as Fast Bonds, First Step, and Quick Access, but they will all ask for basic information like your company’s name, address, FEIN, and the owners’ names, address, and social security numbers.
Once the application is submitted and approved, the owners will typically need to sign a General Indemnity Agreement. Most carriers use DocuSign now, but paper applications also suffice. This agreement formalizes your relationship with the surety carrier and applies to all bonds you obtain moving forward.
Congratulations, you are now “bond-able.” Your agent can provide you with a bondability letter (aka a Good Guy Letter) that states your limits and surety carrier. This letter can be utilized for prequalification with owners and general contractors, and should be updated annually as your company grows.
From here, you can start identifying and bidding projects that require bonds (including bid bonds or performance and payment bonds). Obtaining your first surety bond as a construction company owner is a significant milestone in your business’s growth, but it can be a simple process.
