Rapidly escalating California contractor license bond rates are a hot topic as of late and for good reason. Many contractors have seen their license bond renewals increase from around 1% of the bond premium to well over 10% in some instances. While premium changes of this magnitude may come as a surprise to unsuspecting contractors, there are opportunities to proactively lower bonding costs prior to renewal. Below are 5 simple, yet highly effective tips contractors can use to achieve lower license bond rates.
1. Check Your Credit
On of the most important factors in obtaining a low priced license bond is having good credit. For many sureties, a FICO score around 680 or so with a clean license history will qualify a contractor for premier rates. With this in mind, contractors may consider obtaining a copy of their credit report and correct any inaccuracies prior to renewal. Even positive shifts of just a few points in credit score could save hundreds of dollars per year in some circumstances. For contractors with very poor credit, it may be advisable to seek help from a qualified credit advisor.
What If I Have Bad Credit?
If your license bond renewal is a few months down the road, you may want to request a copy of your credit report. Most sureties will check a contractors credit 90-120 days prior to their renewal date, which provides the added benefit of giving contractors plenty of time to address any potential causes of a high bond renewal rate. They key is to plan ahead and begin work right away to address items relating to credit or licensing issues.
After reviewing your credit report, you should have a good idea of where you stand in terms of credit score, tax liens, bankruptcies, prior bond claims, CSLB license status, etc – basically some of the major items that can impact your bond rate. Next up is addressing the issues when possible. We have had customers tell us after reviewing their credit report, they have found certain items were reporting incorrectly. In some instances, underwriters with the surety have been able to recheck credit and provide a rate based on the updated information, provided it’s been updated on the credit report and or the CSLB, though this is generally done on a case by case basis. Other customers have reported having found success working with a credit specialist.
Depending on where you fall on the spectrum in terms of “Bad Credit” and other rating variables, you should have a clear picture of what you may be looking at in terms of license bonding costs. If your bond rate is very high, some carriers will offer a co-signer option which can significantly reduce the bond premium in some instances, presuming your co-signer has decent credit. If you do go this route, however, make sure your co-signer fully understands what they are getting into. If there is a claim on your bond down the road, they could be on the hook as much as you in terms of repaying your surety. Contractors considering this approach should provide potential co-signers full disclosure regarding the financial ramifications in the event a claim were to occur. With this in mind, obtaining a co-signer is not for everyone.
2. Consider a Cosigner
Contractors with very bad credit may want to consider getting a cosigner. For many sureties that offer a cosigner program, the cosigner generally needs decent, but not great credit and they cannot be the contractor’s spouse. Keep in mind, however, in the event of a bond claim; a cosigner is equally responsible for any losses sustained along with the contractor.
3. Resolve Any Outstanding License Complaints
One of the most damaging issue contractors may face in their quest for low license bond rates is having a claim against a prior bond. Many sureties will not write a bond for a contractor with a prior bond claim, while others will only consider it in some circumstances . With this in mind, contractors should do everything possible to resolve potential license complaints or bond claims before they happen.
4. Shop Multiple Sureties
Not all sureties have the same underwriting requirements when it comes to contractor license bonds, and in fact, many are quite different. If you are not happy with your current license bond rate, shop your bond with multiple sureties. You may be surprised at the results.
5. Purchase a Multi-Year Bond
The tough contracting economy in California has had a dramatic negative impact on the average credit score of local contractors in recent years, which in turn has often led to higher average bond rates. If you’re a contractor with good credit and low bonding rates, consider locking in your bond for several years. While its questionable whether preferred license bond rates will go down significantly in the future, they can become exponentially more costly if a contractor’s credit or other bond rating factors become less favorable over time.
Are Cheaper Contractor Bonds Always Better?
Does The Surety Automatically File Bonds With The CSLB On Behalf Of Contractors?
One of the more important features contractors should want from their surety is to have their bond automatically filed for them with the Contractors State License Board. Not only is having to manually file a license bond very inconvenient and time consuming, but, more importantly, it leaves open the possibility of a contractors license being suspended if it’s not applied properly or in a timely manner, which can be catastrophic. All of the sureties we work with automatically file bonds with the CSLB including Suretec, Wesco and HCC Surety (American Contractors Indemnity), though not all sureties necessarily provide this service. In our experience, if a surety does not automatically file with the CSLB, it’s not a surety we would like to work with for contractors license bonds.
Does The Surety Provide an Automated Purchase & Renewal Process For Bonds?
Time is money for contractors and the more work that is required for them to purchase a bond and have it renewed means a bond with a lower premium may actually be more costly when factoring in a customers valuable time. Some bonding procedures that can be less efficient include having to complete paper applications (vs. electronic applications) or having to complete a new finance agreement or other procedures that may be redundant upon renewal. For some sureties, trading a lower bond premium may mean more leg work for contractors and a higher level of frustration. In our experience, some sureties certainly do a much better job than others in designing bonding programs to be as simple and pain free as possible for all involved parties.
How Does The Surety Handle Bond Claims?
How a surety handles claims can be an important consideration for contractors. Some sureties may handle claims in house while others may outsource the process. Larger sureties that historically write more contractors license bonds will often have more experience in making sure claims are handled appropriately. There are very few things more frustrating than a sureties claims department siding with a contractors customer without performing a thorough and complete investigation from the contractors perspective. Contrary to popular belief, a surety does not like a bond claim any more than an affected contractor as these inevitably cost the surety money. The more experienced a surety is in handling claims the more it benefits all parties involved in reaching a fair resolution to any dispute.
Comparing Bond Indemnity Agreement’s Between Sureties
Each surety will have contractors sign an indemnity agreement as part of the bonding contract which outlines the responsibilities between the contractor and the surety with specifics pertaining to bond claims among other items. Each agreement will differ between sureties and it’s a good idea to understand what those differences are when making a bonding company choice.
What is The Sureties Bond Cancellation Policy?
Many sureties will have the first $100 of any bond premium be fully earned in the event of a cancellation request, while others may have less favorable cancellation policies. Some sureties make their bonds fully earned and non refundable which can impact contractors that plan on being in business only part of the year or plan on switching legal entities which will require a new bond. In situations such as these, what appears to be the cheaper bond may actually be more expensive. Contractors may want to inquire about a sureties cancellation policy in the event they need to cancel the bond mid term, even if it seems unlikely at the time of a bond purchase.
Does The Surety Offer Bond Financing & How Much Is It?
Many contractors choose to finance bonds that are significantly more than $100 per year on average. Some sureties will finance bonds in house, while others require it to be arranged from a third party premium finance company. Financing terms and availability can fluctuate widely between sureties and finance companies. Understanding how much a bond will cost after factoring in finance costs may lead what appears to be a less expensive contractors bonding option to actually cost more.
Other considerations with bond financing include how a bond is financed. Some financing companies are quite efficient and will set up an automatic debit from a contractors credit or debit card each month while others mail a coupon book out where a contractor must remember to mail out their bond payment when periodically due. From our experience, these arrangements lead to a significantly high rate of delinquencies resulting in bond cancellations and/or late fee’s. In our opinion, this is not an efficient form of financing.
Is The Surety Financially Stable?
Recently, several surety companies have joined the California contractors license bond industry that may have less experience with these particular types of bonds than others. The increased competition can be good for contractors if it drives down bonding costs. However, inexperienced sureties can potentially create problems for contractors for several less obvious reasons. If bonds are not appropriately priced for the long term, rates and the sureties financially rating could suffer leading to turnover and instability. Contractors may find they need a new surety on renewal, among other potential problems.
Is The Surety On The CSLB List of Approved Bonding Companies?
The CSLB requires any participating surety to be on its approved list for providing contractors license bonds. Most likely this is not an issue as there is a very good chance that if a surety is providing a bond quote, then they are on the approved list, though this is something to keep in mind, especially if the surety in question does not normally write many contractors license bonds.
Some Sureties Offer Both a Great Bonding Experience & Low Premiums
On a final note, from our experience some sureties consistently offer a very good bonding experience for contractors as well as consistently competitive bond premiums. Having a lower bond premium does not necessarily have to come at the cost of sacrificing the items mentioned above. However, it’s a good idea for contractors to look beyond the initial premium in deciding which bonding option provides the best value in terms of price and other associated benefits.
By Jeremy Schaedler