How Hard Is It To Get A Surety Bond With Bad Credit?

Posted on: 5 December 2016

Bad credit is something that millions of Americans wrestle with on a regular basis. Having a less-than-stellar credit score can be a hindrance when it comes to making important financial decisions, including obtaining a surety bond for your business. If you're wondering how hard it will be to obtain a surety bond with a poor credit score, then you'll want to take a look at the following information.

Things Could Get Expensive

Like mortgage and business loan lenders, surety companies like NFP, P & C, Inc. are taking a risk whenever they underwrite a bond for a customer. The surety company will find itself on the hook if the customer, also known as the principal," defaults on the terms of the surety agreement. In this light, a customer's credit score can be a fairly reliable predictor of a person's future financial habits and the likelihood of a future default.

So it's little wonder that obtaining a surety bond could prove expensive if your FICO score happens to be in the "subprime" range (below 650) or if you have other bad marks on your credit report (such as a civil judgment or tax lien). According to Crystal Ignatowski, you could end up paying anywhere from 4 percent to 15 percent of the surety bond amount. In comparison, you'll only pay 0.5 percent to 3 percent of the surety bond amount if you have good credit.

You May Be Limited to Non-Standard Bond Markets

Many surety bond companies on the so-called "standard" market may close their doors to bad-credit customers, usually in an effort to protect themselves against risk and liability. As a result, you may be limited to obtaining surety bonds through the non-standard market. There is little to no difference in terms of the risk protections offered for non-standard surety bonds, but the rates are usually higher, as previously noted.

You May Also Need to Put Up Collateral

Companies offering surety bonds through the non-standard market may also demand additional assurances prior to issuing a surety bond. For example, you may be required to put up some type of collateral in order to secure your surety bond. The required collateral usually comes in the form of a cash deposit or property.

Although putting up collateral can help you obtain a surety bond in spite of a bad credit history, it could put you at a disadvantage in a couple of ways:

  • Any collateral used to secure the surety bond won't be available for other uses. For example, you won't be able to tap into cash held as collateral as a source of capital for emergency funding.
  • Collateral can be held beyond the release date of the surety bond, sometimes for a year or more. This can prove detrimental if you're counting on quick access to cash formerly held as collateral.

Also keep in mind that there are certain types of collateral that surety bond companies won't accept. For instance, most companies won't accept certain physical assets (such as automobiles) as collateral due to the difficulties of storage and liquidation.

Seeking Alternatives

Obtaining a surety bond with not-so-perfect credit can be an uphill battle. Fortunately, a growing number of bond providers are specializing in issuing surety bonds specifically to customers with bad credit. Some bond companies may also offer incentives to help ease the burden of having bad credit when applying for a surety bond, such as a significant reduction in the amount of collateral needed to secure a bond.

Surety bond costs can vary significantly among multiple companies, so it's always a good idea to shop around for the most favorable rates on the non-standard bond market.