How HVAC contractors can cut down on bonding costs
The financial factors that affect your bond rate
The cost you pay to get bonded is usually a percentage of the total amount of your bond. But two HVAC contractors obtaining the same bond for the same amount may often pay very different rates on their bonds. When determining the cost of a contractor’s surety bond, sureties often review personal credit score, business and personal financial statements, asset verification and industry experience.
Based on how the above factors influence your HVAC contractor license bond cost, here is how you can improve your contractor license bond rate:
Check and fix your credit score
The most important factor in improving your contractor license bond rate is your credit score. The higher it is, the lower your rate will be. This is due in part to the correlation that surety industry experts have established between a business owner's personal credit and the likelihood of a claim being made against their bond.
You can request a free credit report from each of the three major credit reporting agencies once every 12 months. By reviewing your credit report, you can make sure the information that is listed is up-to-date, correct and complete, you can clean up any errors or omissions. Cleaning up negative items on your credit report, such as unpaid debt or outstanding payments, will have limited effects but it’s not a total lost cause. Pay off debts and get outstanding payments like tax liens, collections, and overdue child support back on track; keep the remaining credit cards to at least 30 percent below their limit and make regular payments on your bills and obligations above the minimum amount.
Once you develop a good track record of regular payments and successfully paying off old debt, you will see your credit score rise in no time.
Manage your working capital
Your working capital (assets less liabilities) is another influential factor that can tilt your bond cost upward or downward. Clearing your accounts receivable by collecting any uncollected payments or debt will increase your liquidity. Even just demonstrating to the surety that you have uncollected payments is an indication of your stability. Similarly, by turning short-term loans into long-term loans, you will further open up more working capital.
By doing all of the above you are showing the surety that you can handle your finances and know how to hold your business' reins.
Provide financial statements
Both your business and personal financial statements can have a serious impact on your bond rate. Your business financial statement, particularly if created by a skilled accountant such as a CPA, provides the surety with important information about the past and present financial performance of your business.
Your personal financial statements, on the other hand, reflect your personal assets, the amount of your liquidity, and your net worth which are also considered by a surety when vetting an applicant's ability to repay claims.
Polish your professional resume
In determining the cost of a bond, particularly for bonds with higher amounts, sureties need to be able to vet applicants carefully. The amount of experience and the length of time you have spent in your industry, as well as your character and personal history are all tools which you have at your disposal in negotiating your bond cost.
If you have a good business reputation and have been working in this industry for a while — if you are free of convictions and penalties, and have not had your license revoked — all of this can be used to your advantage when applying for a bond. If you do have some black spots on your record, the best course of action is to be honest and direct with the surety — this, too, demonstrates good character and good business.
Pick a good surety agency
Last but not least, picking a good surety agency can make a significant difference on the rates you are offered. Surety agencies work with sureties companies, which are the companies that issue and back bonds. Agencies work with different companies, and not all companies are equally financially stable and reliable.
When picking an agency, make sure they work with A-rated and T-listed companies. When a company is A-rated, this means that they have a very high rating according to the A.M. Best rating company which is a Nationally Recognized Statistical Rating Organization (NRSRO). If a company is T-listed, this means that it has been approved by the Department of Treasury to issue bonds for federal projects. This, too, makes them a very robust company which you know you can rely on, allowing you to work on federal projects requiring a bond from T-listed bonding companies.
Got more questions regarding surety bonds? Leave your questions in comments.