There are 3 parties involved in a contractor bond relationship. These parties are the obligee, the principle, and the surety entity. A party (the principal) gets into an agreement with another party (the obligee) to perform a particular function. A third party, not privy to the initial agreement may vouch for the principal’s performance using a surety or contractors’ bond. The bond is usually in the form of a promise that the surety company will pay the obligee a specific amount if the contracting party (the principal) fails to fulfill their obligation.
In a situation where you are the principal, you have to pay a certain amount of money to the surety company in order to get the bond. The amount you pay is calculated as a percentage of the total bond amount. The rate you pay is a direct reflection of what the company deems as the possibility of you causing the obligee to make claims in the event that you fail to perform your obligation/s hence cost the company to pay the bond. But how exactly do you get the best deal in all this? Here are few tips to finding the best contractor bond rates you might want to look at.
Fix Your Credit
The primary factor that surety agencies will use to investigate if you can repay them is your credit score. Your credit history and creditworthiness will give your surety an idea on your reliability, which may raise or lower your rate. Clear up any outstanding payment or taxes. You can also pay a visit to a credit repair organization that will help you clean up any personal credit issues. The cleaner your credit card financial information looks, the lower the rate you will have to pay.
Increase Your Working Capital
Your working capital is calculated by deducting current liabilities from current assets. If you have a good amount of working capital, it reflects your liquidity and financial stability and thus your ability to pay your dues without strain. You’re more likely to find better bond rates when you have a high working capital. To do so, you can consider converting any short-term loans into long-term debts and increase your current assets such as stock or debtors, for instance.
Select a Reliable Company
It goes without saying that the contractor bond rates you get will depend on the surety company you select. In other words, rates given vary from company to company. Conduct research to find out about the reputation of the company through reviews and if they accommodate the specific bond you need. This is what reliability entails.
Build an Attractive Portfolio
The surety company will not get a full picture of your reliability just from your financials. You need to provide them with proof of successes that you’ve achieved in the past. The longer you’ve been in business, the better it will be for you, especially if you have proof of experience. Such information would affirm that you have a lower risk of causing claims and thereby improve your chances of getting better bond rates.
Show Some Financial Strength
Last but not least, you can improve your chances by showing a strong net worth. Having a sustainable net worth would prove to the underwriter that you can stay in business and also pay off the bond even in diversity.
Getting the best contractor’s bond rate is a matter of proving to the surety underwriter that you have a low risk of causing claims on the bond and that you have the financial muscle to pay your rates. These are some of the most important things to consider when seeking the best bond rates as a contractor.