What is a surety bond, and how do I secure one?
A surety bond is an instrument under which one party guarantees to another that a third party will perform a contract.
How Does the Bonding Process Work?
Securing a surety bond is similar to obtaining a bank line of credit. So, just like a bank, a surety company must know a business before committing its assets. It will require a lot of time and effort to establish a first relationship with a surety company.
The surety process is focused on pre-qualifying the firm. The surety company must be satisfied that the contractor/vendor has met certain criteria. The firm must:
- Be of good character
- Have the capacity to meet the requirements of the project
- Have the necessary capital to support expected project costs
- Be in good standing with a bank
- Have established a line of credit
- Be a business that is well managed
Each surety company has its own standards. These fundamentals are most common.
Types of Surety Bonds
- Bid bond: provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid.
- Performance bond: protects the owner from financial loss should the contractor fail to fulfill the contract requirements in accordance with the term and conditions of the contract documents.
- Payment bond: guarantees that the contractor will pay certain labor and material bills associated with the project.
Tips on Obtaining Bonding
Basic steps needed in obtaining a bond include:
- Identify a bonding agent.
- Visit at least three bonding agents. Find out what they offer and explain your firm’s marketing goal.
- Develop a relationship with a bonding agent as soon as possible.
- Ask persons in your industry which agent obtains bonds for them.
- Select the bonding agent who offers the best services for the price and will advise you in the area of bonding as your firm grows.
- Select an independent Certified Public Accountant (CPA). Bonding agents will require financial statements of your company prepared by an independent accountant.
Fiscal-year-end and six-month financial statements will be submitted regularly to your bonding agent. This will save the agent time.
How Do I Quality for Surety Bonds?
Select an agent (preferably one who specializes in your particular industry) and discuss your plans with him/her. Provide the agent with the following information:
- Business plan and organization chart
- Resumés of key principals with a description of the largest completed jobs, including names and telephone numbers of owners, financial statements, tax returns, and bank relationships.
How Long Does It Take to Pre-Qualify for Bonding?
This depends solely on you and how well prepared you are. For owners who have met all the requirements and can produce the information to the surety company in an acceptable manner, the process can be accomplished in five to ten working days. But, do not underestimate the time it takes to prepare your paperwork.
First impressions with the bonding agent are crucial. Business owners will only get one chance to make that first impression. Remember, the dress code for business negotiations and for business activities may be different.
Increasing Bonding Capacity
To increase bonding capacity reduce large cash outlays and establish a working capital base and net worth consistent with the volume of work the business wants to accomplish. Complete all work on time and pay your subcontractors and suppliers on time.
SBA’s Surety Bond Guaranty Program
Small contractors, who require surety bonds to perform on construction or service contracts, can apply to the U.S. Small Business Administration (SBA) for bonding under the Surety Bond Guaranty program.
In order to be eligible for a bond guaranty by the SBA, a small contractor must qualify as a small business in accordance with SBA size standards and the principals must be of good character. If the firm’s annual average sales over the past three fiscal years have not exceeded $6 million. The SBA can guarantee surety bonds on contracts up to $2,000,000. The fee charged by the SBA for the guaranty is $6 per $1,000 of the contract amount.
For information on the Surety Bond Guaranty program, contact:
SBA District Office
Zurich North America
1 Upper Pond Road, Bldg. E-F
Parsippany, NJ 07054
Heritage Insurance Agency Inc.
1317 South Main Road
Vineland, NJ 08360
G.R. Murray Insurance
Division of O’Gorman & Young, Inc.
707 State Road
Rte. 206 North
P.O. Box 83
Princeton, NJ 08542
Global Indemnity Insurance Agency, Inc.
20 Highland Avenue
Metuchen, NJ 08840
International Fidelity Insurance Co
One Newark Center
Newark, NJ 07102
800-333-4167 Ext. 290