Obtaining Performance Bonds With Poor Credit
A surety bond is a financial instrument, not an insurance policy in the traditional sense. (Click here to see blog post on the three parties of a surety contract.) As such, the credit of the owners of a construction company is an important variable in the underwriting process. Fortunately, there are options available to obtain performance bonds even if there is challenged credit.
The economy is starting to chug along, projects are moving forward, bid lists are shrinking, and there is generally a more positive outlook from the construction industry. Contractors are ramping up their operations but many are hitting a road block when it comes to bonding due to the recession’s toll on their personal credit. While damaged credit does make it more difficult to obtain bonds, below are some tools, programs, and ideas to get in the game.
The Small Business Administration (SBA) bond guaranty program -Like FHA loans that guaranty bad debt to a bank, the SBA bond guaranty program offers collateral guaranties to surety companies, ultimately helping contractors obtain bonds when they otherwise could not.
A quality cosigner – This could be an option for small contractors, especially those with just a small bond performance and payment bond need.
Collateralize the bonds – There are surety companies that specialize in this niche. While prior bankruptcies or damaged credit eliminates a contractor’s chance of bonding in a standard surety market, non-standard sureties can put together deals with collateral to secure the bonds. Cash, Irrevocable Letters of credit from a bank, and sometimes real estate can help a contractor secure the bonds they need.
Fund Control – This is a 3rd party administrator that manages the flow of funds for a particular bonded project. The surety is assured all subcontractors and suppliers are paid, along with the assurance the project is adequately funded.
Joint Venture – A contractor with poor credit can partner with a credit worthy contractor to create a joint venture. In the right scenario, this can be a win-win for both parties.
These are just 5 options to consider when a contractor has poor credit. Sure, a contractor can expect to work harder on the paperwork side and pay a little more for the bonds, but there are ways for those hit by the recession to obtain the bonding they need to pursue public works.
Surety 1 has several markets that can utilize the tools discussed. For more information contact us at 877-654-2327.