Overcoming Obstacles in Obtaining Bonding: Episode 2

When you are looking at a bonding agent to represent, one of the things that we talk about is the number of bonding companies they have access to. I know your company and you could talk about how many companies are out there in the marketplace and how many you have access to.

The important item just to touch on, if you don't mind, is the fact that certain bonding companies (not you or the agent) favor certain types of businesses, be them general contractors, electrical, mechanical, drywall, paving; whatever the case may be. Could you touch quickly on the number of companies out there and why it’s important that your agent has access?

Brian Whipple:

That's a great question. The surety marketplace, while it fits within the larger property and casualty marketplace, is really a much smaller kind of community. The list of the top 100 writers of surety bonds encompasses pretty much the entire industry, as opposed to the property and casualty marketplace, where you have thousands of insurance companies writing insurance policies. Within the surety world, it's a much smaller number. Within that list, you also have significant delineations.

As I mentioned at the onset, the federal government requiring surety bonds was the birth of the surety industry. Since that day, the federal government requires that those companies writing surety bonds are approved by them. So, the treasury listing (or in regular nomenclature, the largest bond a surety company is allowed to write) is very important.

Some surety companies might have a treasury listing of two, three, four million dollars. They're obviously going to be working with much smaller contractors that are just getting started. Then you have other surety companies that might have treasury listings close to or over one billion dollars—obviously, those are the guys that are going to be writing the mega contractors, the guys that are growing into that space.

But there are times when a contractor wants to grow from their current program and they need to make a switch in surety companies, not because the broker wants them to move, or even because they want to move or the surety wants them to move, but because that surety doesn't have the treasury listing to support the bond sizes that they may need moving forward.

Don Hoffman:

We've been asked as CPAs to look at—and I don't know how much they're out there anymore—private sureties. There were very wealthy people that said, "Look, I'm just going to write a bond based on my assets that I have, and I might charge a very high fee because I know you can't get a bond anywhere else through the quality companies that you're talking about, Brian." What is the status of these private sureties, and can you talk about exactly why people even go to them?

Brian Whipple:

You're pointing to individual sureties or private sureties. In many states at this point, those individual sureties are not allowed to conduct business. Unfortunately, we've had situations in the industry where the standard surety marketplace was unwilling to take on a bonded risk, and as a result, those companies were forced to go into the individual surety marketplace. Unfortunately, as claims occurred, we found that many times those individual sureties did not deliver on some of the promises that they initially made.

Our advice almost always remains that we need to stick with treasury listed surety companies. We need to stick with companies that have balance sheets that are approved by the various insurance administrations, approved by the federal government, et cetera, to make sure that we have the right partners for our clients.

Don Hoffman:

Brian, another question. In your opinion, when you're out there dealing with people and they have challenges or run into obstacles in getting bonding for their companies and it's regarding their financial strength or credibility, how do they overcome these obstacles? What do you recommend they do?

Brian Whipple:

That's a great question, Don. I think initially what a lot of contractors can do is find brokers that are able to be creative and utilize tools like funds control, collateral, and personal indemnity that allow them to get over the hump of getting a couple of bonds written initially. That's certainly an important role of the broker. I think secondarily, the long-term planning and walking a contractor through what they should expect going forward is equally as important.

When it comes to what a contractor can do in the long-term, first and foremost, it's surrounding themselves with the right people that are able to help them and guide them; people like yourselves that have expertise in construction. The number one most important thing for a contractor is a good CPA that can help them understand not only where they are right now, but where they're going to be six to 12 months from now.

I think in addition to that, the ethos of starting small and growing gradually over time while being very conservative is really the best way for a contractor to grow. If a surety or multiple sureties are saying no to writing a bond, there's usually a reason for that. You need to recognize as a contractor that if multiple sureties are saying no, the risk presented to them is simply too great, and then keep in mind that the risk they're taking on is the same risk you're taking on. If all those surety companies are saying, "This is too risky, you shouldn't do it," it's probably a good idea to go back and re-examine whether the project itself is a good one to take on, because you're in the same boat as they are. If they don't think it's a good idea, maybe it's not a good idea.

Don Hoffman:

Brian, thank you so much for your time today. In the next episode, Brian will be back to discuss how to increase your bonding capacity by restructuring debt and ways to build trust with your surety agent. I highly recommend everybody join this next podcast because this could be instrumental to the long-term growth of your company.  

^{Transcribed by Rev.com}