Three C’s Used in Underwriting Surety Bonds

Contributed by Mike Lapre

When surety companies are asked to provide bonding for individuals or companies, the level of credit which is involved can generally be determined by a fairly universal formula which is observed by the surety industry. That formula is based on what is known as the three C's, and these are factors which will serve as a strong guideline for determining just how much credit can safely be extended to any bonding applicant. Those three C's are described below, so that if you have a fairly clear idea of how your company rates in each of these three areas, you should also have a fairly clear idea of just what level of credit you're eligible for.

Character
Any underwriter who is trying to evaluate an applicant's character will take into account their personal credit history, their business credit history, their track record for paying bills, reputation in the community, any public liens or judgments, and their management experience. Any of these areas which are found to be weak or questionable will definitely have an impact on the underwriter's decision, although it probably would not disqualify an individual from becoming bonded.

There are also ways in which you can improve on these areas, so that you're more likely to be bonded for the amount you want. Obviously one of these areas is to make sure that you pay your bills on time consistently, and that you catch up on any outstanding old bills you may have. It's a good idea to have lines of credit available to you, but it would be better if they are not used often. It's always good to keep an updated resume on hand, in case it's needed for consultation by a bonding agent.
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You should be able to explain any negative lines or mistakes on your credit history, or any past-due items which appear there, whether or not you caused them. You should always be as honest as possible with your bonding agent, and consult with them whenever there are any major financial events which have occurred to your business. By being forthright on all these issues, you'll have a much better chance of achieving the level of bonding that you are hoping for.

Capital
Capital is generally the bottom line for any transaction, and the bonding process is no exception. The financial resources owned by any company such as a construction firm, will always be heavily factored into any bond underwriting decision. When assessing the capital situation for any company, it's always necessary to consider credit lines, working capital, profitability, equity, debt to equity ratios, and even personal financial condition. It's no exaggeration to say that capital may be the single most important factor in any underwriting decision.

There are several avenues available to a company wishing to improve its capital situation, starting with restructuring debt if that is a possibility. Your company will also be more appealing as a bonding candidate if short-term debt can be converted to long-term debt. In some situations, increasing capacity can improve profitability, so if your company is in that position to do that, your capital situation may be significantly enhanced. Reinvesting in your company can also be a very good to improve your capital situation. In addition to consulting with your company CPA at the end of the year, it's probably a good idea to also consult with your surety company, since the value of bonding can have a serious impact on your company status.

Capacity
Capacity involves having sufficient resources available on a daily basis to complete the volume of work which any contractor or any company currently has on its agenda. When assessing capacity, an underwriter will evaluate the staff which a company has, in terms of their management ability, internal controls, supervisory skills, project management capabilities, and their teamwork proficiency. All these are critical factors in determining the capacity that a company has to accomplish work.

Apart from the staff members, the equipment and the tools must also be evaluated, since this will also have a serious impact on a company's ability to complete work. For instance, a construction company which needs to haul materials to four different construction sites each day, but which has only two trucks, probably lacks the capacity to efficiently complete those jobs.

There are some ways that company capacity can be increased, so that the firm becomes more appealing as a bonding candidate. Setting up good internal controls is one great way to start, and then having good project management systems in place will also be extremely helpful. Work-in-progress reporting is essential to having an understanding of where projects are in their life cycles, so there must be a good reporting system established.

Hiring qualified personnel is essential to maintaining strong capacity for any company, as is maintaining up-to-date resumes for each of your staff members. Periodic evaluations of the physical equipment and tools necessary to accomplish the current body of work should be undertaken, so that there are always sufficient resources available to accomplish work on time. When all these capacity factors are strongly considered by a company, it will make that company a stronger candidate for underwriting a bond at the level desired by the company.

(Note: Mike Lapre oversees the bonding department at a nationwide insurance broker and consultant that provides employee benefits, property and casualty, retirement and individual solutions which specializes in surety  bonds.)