The underwriting process for obtaining a bond for a project or establishing a surety program is similar to applying for a loan. However, instead of actual funds being provided by a bank, the owner or general contractor requiring the bond (obligee) is given a third party financial guarantee (a bond) which guarantees the performance of the contract and the payment of labor and material bills incurred in the construction of the project.
Establishing a bond program can take several weeks or longer as the information is compiled, analyzed, and verified. Accordingly, it makes sense to establish a surety program before a bond is actually needed.
The underwriting information required and their significance follows:
1. Corporate year-end financial statements for the past three years. The statements will be analyzed to determine the financial condition of your company. Important factors will be working capital, net worth, debt structure, profitability, and financial trends.
2. Interim financial statements, if available. Surety companies do not want to wait more than six months between financial statements.
3. Aged schedule of accounts receivable and retainage receivable, which ties into the most recent financial statement provided. Subsequent receipts should be noted. This schedule helps confirm the collectibility of accounts receivable which is a major component of working capital.
4. Current work-in-progress schedule. This schedule will be used to determine estimated profitability, billing trends, and backlog. View Contractor Status Report.
5. Current personal financial statements of all stockholders. Sureties usually expect to receive personal indemnification from the owners of the company. View Personal Financial Statement Form.
6. Affiliate financial information. Inter-company transactions, cross corporate obligations and financial exposure will be evaluated. Sureties usually require cross corporate indemnity of affiliates.
7. Unsecured Bank Line of Credit commitment letter. An available bank line can provide needed cash to complete projects while funds are tied up in retainage and the normal agency payment process.
8. A corporate organization chart, resumes of key employees and corporate business plan are useful if available. This reflects the structure of the company, the experience of its personnel and the direction in which the company plans to go.
9. A completed contractor's questionnaire. This will list largest completed jobs, supplier references, banking facilities, corporation information, key employees, etc. View contractor's questionnaire.
When all this material is received, a clear picture of your company is developed. We will normally meet with you at your office to discuss the underwriting information and provide you with a copy of our analysis of your financial information. We will then make a formal submission to the surety company that we feel will best meet your surety needs. The surety will then conduct its own underwriting review, including reference work, a meeting with you, and a review of a credit report to determine whether it will provide the requested surety support.
A complete submission of information will greatly decrease the time it takes to establish a bonding relationship and help to maximize surety credit. Because the surety business is a specialty it is very important to work with a knowledgeable surety agent. We do business with all the major bonding companies and have the people, knowledge, and experience to help you establish the best possible surety program under the most favorable terms and conditions.
If ever we can be of service in the bonding or insurance area, please give us a call at 800-333-7234.