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How Do You Qualify For A Surety Bond?

If you own a company, you’ll surely want to be able to fulfill all your financial liabilities. If you are considering having a Surety Bond, this article is designed for you. But first of all, let’s get to the basics and clarify what it actually is, and then move on to how your company will be assessed.

Surety Bonds

Its other name is a performance bond – that is, it’s a guarantee of company performance. A business will have certain responsibilities towards a third party. The company will either fully meet these responsibilities, or the third party will be able to regain its losses. 

There are three parties involved in the bond:

  • The principal (you) 
  • The surety (the providers of the bond)
  • The obligee (the third party that needs this bond to exist) 

The specific type of bond and what is needed to acquire one will vary according to what you do business-wise and whereabouts you are located. 

We’re usually talking about large amounts of money here, so a surety will need to do lots of research to ensure your company is stable and financially sound. As for all things, you’ll find lots of information online such as this useful resource which is top-rated for providing quotes, because your company must have the assets needed to meet any debt you undertake. Further research will help you identify the specific bond type you need, and the amount you require.    

What Do Bonding Companies Look For?

Business Organization

A surety will want to know how well organized your company is and how compliant you are to company legislation. The auditors will want to be able to easily access systematic and full accounts and records for every level of the business and every individual. You will, therefore, need to check this is all ship-shape and ready.

How does your company make its money?’ and ‘Do you do it ethically?’ These will be questions you’ll be asked. Sureties will want a financial statement showing the workings of your company. The CPAs, or the Certified Public Accountants, know how to collect and present this information in a way that the auditors will want. The bond company will go through the company accounts with a fine tooth-comb and look at each individually and consider credit histories. They’ll also look at company cash flow, and will want to know that you could afford the interest on the bond debt.

The auditors will want to know who are the owners of your company and how it has performed over time. You’ll be asked how you have managed to stay in business. They’ll also want to know whether most staff have been there from the beginning or if they are coming and going very quickly. If there’s a high turnover they’ll want to know how that compares with other similar companies. 

Auditors will consider whether things would collapse if you were incapacitated, left, or retired. Your business plan for the future also comes into play here, regarding your chances of company longevity. They will want to see that you are forward-looking and able to actually achieve your goals. Expansion plans will cost money, needless to say, so everything has to be taken into account.   

The Capacity of Your Business

Your company’s capacity is another thing a surety will be looking at. They’ll ask if you succeeded like a rising star and if this could be very short-lived. They will worry if you offer low prices and discounts that are not business-wise or sustainable long term. They will want to know that if you experience a dramatic rise in the business, if you’ll be able to handle it, or if you’re coping with the business you already have. The other scenario is where some companies have grown steadily but surely over time. 

Back-up Plans

Another area you will be assessed in relates to back-up plans. By this, I mean regarding retirement, employee stock options, and investments. 

Relationships with Other Parties

They will want to know how business contacts (subcontractors and vendors) relate to you – have there been problems in the past? A chat with your employees can also be very revealing, so be prepared for them to be interviewed – particularly the strategic kingpins! The opinions of the company banker will also carry a lot of weight. 

As you can guess, one missed element by a surety could have very expensive implications. They will want to know that there is minimal risk involved. If they don’t fully trust your business, you’ll either be declined or have approval based on one specific job rather than all jobs. The positive side of this is your premiums will be less than you anticipated. It’s not a closed-door to increasing your cover over time either if you continue to succeed as a business. 

We have now defined what a Surety bond is, and what bond companies will expect from you. All in all, this is an area where you need to take plenty of advice. Your financial commitment could be for one to two decades, so you need to be very confident in your next steps. I trust this article has furnished you with some helpful information. Good luck!


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How Do You Qualify For A Surety Bond?

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