Fast bond products or “quick issue” bonds have sped up the process of obtaining a bond for smaller projects. Quick turnaround and minimal underwriting—sometimes solely based on credit score—allow for speedy answers when time is of the essence. That’s the upside.
The downside of this softer credit-based underwriting is that the relationship-building and counseling process can suffer. These quick-turnaround transactions have drastically reduced the information-gathering discovery phases of early agent, contractor and surety relationships, which can have far-reaching effects for a contractor down the road as the company tries to grow.
Suppose someone has $10,000 to invest for retirement. Option one: He simply takes it to the bank and opens up a CD. It’s in a safe place, growing a little—job done. Option two: He can talk to a financial advisor and take a little time upfront to share his retirement objectives, whether it’s fulfilling a lifelong dream of sailing around the world or investing in savings for family members. Once the individual’s end game is apparent, the advisor gains direction on risk tolerance for investing to help reach incremental goals.
The same holds true for contractors with smaller bond needs. Yes, they can obtain a quick credit-based bond for small projects. When it comes to being a small contractor, the product is appropriate for the need, but contractors should beware of the process, or lack thereof. What’s often sacrificed here is the sharing of strategy and objectives.
Does the contractor want to contract for smaller projects forever? Does the contractor want to continually pay the higher premium for a quick bond product? Does the contractor want to look only at the short term? Or can the company take a little time upfront with its surety agent, like one would do with a financial advisor? Can the business owner share growth objectives and a little about financial aspirations so there’s more strategy to help the firm grow?
Then vs. Now
In the past, a contractor and its surety relationship grew up together, following a discussion about the CPA’s capabilities to provide a compilation, or even a review. A discussion with the banker would reveal what it would take to get a bank line of credit and consequential increases to the line. Irregularities with the bookkeeping would have been pointed out and discussed.
A general understanding of the contractor’s overall capacity would have evolved, and a comfort level would have been achieved at each stage of the process. The agent and the surety underwriter also would have become comfortable with the character of the business owner and the operations staff, and would understand the succession plans and long-term viability of the business.
These steps still take place to qualify a contractor for a standard surety program, but too often they occur at the last minute instead of as part of a relationship developed over time.
The Trouble With Guaranteed Issue
The surety industry has made the credit-based quick bond process look artificially easy. Contractors are sometimes shocked when they cross an imaginary line and are requested to answer even minor underwriting questions. They often find themselves ill prepared to respond because the communication, counseling and positioning didn’t happen during the credit-based process, nor did it continue after approval. In many cases, there is a lack of discussion about the next step. What comes after a fast bond?
Surety underwriters also assume that the agent is aware of the level of surety participation when more information will be needed. Not having an extensive relationship with the customer, a surety agent might be completely unaware that the contractor wants to grow. When a larger bond need does arise, very little is often known about the contractor’s banking relationship, the key people in the organization or what its CPA is bringing to the table.
Education Needed From the Start
Where does the industry go from here in order to provide the best service to growing contractors? Contractors should look for a small bond program that has different levels of underwriting. In other words, the contractor should be prepared for more information to be requested as the requests for bonds get larger. Doing a little more work upfront will reduce the anxiety of having to do it all later.
Everyone on the surety team needs to understand the contractor’s business plan and the timeline on that plan. It’s best for a contractor’s surety education to start with the first bond need—regardless of the speed at which it is approved.
Remember, a big contractor was once a small contractor. Be open to the probing questions that will help set the business up for growth. Be open to advice from surety professionals, most of whom have degrees and backgrounds in finance, accounting and risk management. Their advice is almost always free and has helped millions of construction business owners get where they are today. Start learning and sharing from surety agents and underwriters from the very beginning—and get ready to grow.
Kevin Lorenz is bond manager for Old Republic Surety Company. For more information, email firstname.lastname@example.org.