Being a successful contractor can be rather challenging when you have bad credit. While it’s not impossible to obtain performance bonds alongside credit issues, you might face difficulties with acquiring contracts. As you already know, performance bonds are everything in the world of contractors as they dictate which projects contractors can work on. Simply put, if you can’t obtain a performance bond, you might not be able to work on certain projects.
Luckily, people with a bad credit score are not left without options. They might need to take some extra steps to get bonded but are still able to obtain this surety bond type. Learn how you can obtain performance bonds with bad credit and the steps necessary for continuing with your business.
What is a Performance Bond?
A performance bond is a type of surety bond that includes three parties in the agreement. With a surety bond, one party (the surety) guarantees the performance or obligations of the other party (the principal) to the third party (the obligee). A performance bond must be obtained by the principal, required by the obligee, and supported by the surety. A performance bond guarantees the performance of a contractor on a specific construction project. This type of bond ensures that the contractor will meet all specifications as agreed to in the initial contract and if the contractor fails to do so, the obligee can make a claim against the bond.
A performance bond is usually provided by a bank or an insurance company and ensures a contractor will complete specific projects to the specifications of the construction contract. It is most commonly used in construction and real estate development to ensure reliable performance. In these situations, an owner of the construction company needs to obtain a performance bond to guarantee the project will be finished as agreed. The performance bond also works as a guarantee of financial reimbursement in case something goes wrong on the project or the principal fails to complete it for any reason.
Why Does Bad Credit Make You a High Risk?
When you are required to obtain a performance bond for a construction project, you have to provide a reliable and high credit score in order to qualify for approval with a surety agency. As we mentioned above, surety companies take on the responsibility themselves to compensate for financial loss when the principal fails to comply with the agreement from the bond. Therefore, they need to know the principal will pay off the debt the surety company spent to cover the claims against the bond.
With all this in mind, it’s clear why surety bond companies evaluate your credit before approving you for a bond. They want to determine whether you are a reliable and trustworthy individual who will pay for any claims filed against the bond. Now, there’s no other way to check whether you can meet your financial obligations under the surety bond than by evaluating your credit score and financial statements. After the underwriters run the evaluation, they offer or decline to issue the bond to the principal depending on the high or low credit score.
If you have a good history of paying back debt obligations, you are likely to get the bond without much effort and at a low premium rate. On the other hand, if you have a large credit card debt, recent bankruptcy, or a low credit score, regular sureties will probably reject your application. In these cases, they estimate you pose a high risk and are less likely to pay off the debt.
Can You Get a Performance Bond With Bad Credit?
With that said, you can still get a performance bond with bad credit. Contrary to the popular belief, it is possible to get bonded with a low credit score and other financial issues. Although not all companies provide this service, there are still many professional sureties that will. Bonding Solutions offers specialized programs for candidates with low credit scores. Therefore, if you get turned down by one surety company, turn to high-risk surety bond companies such as Bonding Solutions, to help you get the performance bond you need to expand your business.
Today’s market is big enough to have both regular and special surety companies. While the former ones have strict rules and don’t offer options for people with bad credit, the latter ones provide more flexibility. Although you will have to take some extra measures to mend low credit scores, high-risk surety bond companies allow you to do it through various tools and programs.
The Performance Bond Underwriting Process
The performance bond underwriting process is very important for surety companies and equally stressful for principals. The process is done to evaluate the contractor’s ability to complete the project and repay any claims that could be made against the bond. As you imagine, that drives underwriters to check every little detail in the contractor’s credit history and financial statement.
Here are some things that underwriters analyze before issuing the performance bond:
- Annual financial statements
- Investment strategies
- Cost control tools
- Total cash flow
- Value of all the non-financial and financial assets
- Working capital
- Credit relationships
- Performance in previous projects and their value
- Equipment and tools
- Staff
- Work and management plan
- Supplies
- Lenders
If underwriters conclude that you comply with all requirements in the areas above, they will approve your application. However, that depends on each company’s regulations.
Obtaining Performance Bonds With Bad Credit
If you have bad credit, you shouldn’t give up on your business. There are ways to obtain performance bonds with bad credit and keep the work going. Let’s take a look at some of the most popular options:
- SBA Bond Guarantee Program. Small Business Administration (SBA) runs Surety Bond Guarantee Program for helping small businesses winning contracts. The SBA program offers collateral guarantees to surety companies when principals can’t get approved regularly.
- Fund Control. This is a tool that allows contractors to manage the cash flow for the bonded project. With it, the principal guarantees the surety that the project is properly funded, which can convince the company to issue the bond.
- Collateral. Another option available to the principals with poor credit is collateral. By providing collateral (cash or a letter of credit from the bank) for the sureties, principals give them an option to cover potential bond losses with these funds.
- Joint Venture. When a contractor with poor credit partners up with the one with high credit, they create a joint venture. It is a win-win situation for work partners and makes surety companies more eager to issue performance bonds.
- Cosigner. Small contractors can also consider having a quality consigner, a person who will pledge to pay back the loan instead of them. We mostly recommend it when a low-payment bond is needed.
These are only some of the most convenient and popular ways to obtain performance bonds with bad credit. You have other options as well to overcome the issues and pursue desired projects. Obtaining performance bonds with bad credit can indeed be a real challenge, but it’s achievable, and you can do it easier with the help of professionals. Bonding Solutions provides consultations and support for contractors looking to obtain a performance bond with bad credit, so you can get things done with ease. Apply online or contact us directly for more information.