Finding an affordably priced surety bond when you have poor credit can be a frustrating experience. Often times, bond premiums for those with bad credit or no credit can exceed 10% of the bond amount. Many commercial surety bond requirements exceed $25,000 resulting in annual bond premiums of $2,500 or more for bad credit applicants! This is a significant cost of doing business for a small business owner.
Insurance companies (the sureties) are all about measuring risk, so when they see lower credit scores, they estimate that a) the risk of a claim is higher, and b) the risk of non-payment on a claim is higher. Both of those factors raise their risk, so they raise the rates to have more coverage for themselves.
Let's look at an example of a California Motor Vehicle Dealer Bond for $50,000 and the premium (cost) for 2 different buyers, Joe and Ted.
| Applicant | Joe | Ted |
|---|---|---|
| Credit Score | 670 | 590 |
| Surety Bond Penalty | $50,000 | $50,000 |
| Rate | 2% | 5% |
| Surety Bond Cost (Premium) | $1,000 | $2,500 |
Ted will have to pay $1,500 more than Joe for the same surety bond!
While there is no way to simply avoid high bond premiums, there may be steps that can be taken to help you get the lowest price possible for your situation. Bond agents and insurers are aware of the high cost and some insurers allow for qualified bond co-signers. This may not be available or ideal for every bond type or every applicant but when available, a co-signer can make a big difference in your bond premium.
Combined Creditworthiness
Why do co-signers or collateral result in lower bond premiums? By having a qualified co-signer, the insurer can feel more comfortable that it will be reimbursed in the event of a claim made against you. This is because the bond is now backed by the combined creditworthiness of the bonded principal (you) and your co-signer. Essentially, the insurer can justify charging you a lower premium for the bond, because your combined creditworthiness is higher.
So let's say that Joe is married to Sue and Ted is married to Mary. Sue and Mary each have excellent credit and each has a credit score of 750.
| Applicant | Joe + Sue | Ted + Mary |
|---|---|---|
| Credit Score | ( 670 + 750 ) / 2 = 710 | (590 + 750) / 2 = 670 |
| Surety Bond Penalty | $50,000 | $50,000 |
| Rate | 1.5% | 2% |
| Surety Bond Cost (Premium) | $750 | $1,000 |
The calculations here are simplified for our example, but will give you a good idea of the impact a co-signer can have.
$1,000 is still a lot of money, but Ted will save $500 by having his wife co-sign! Also notice that Joe saved money by including Sue as a co-signer since their combined creditworthiness is excellent.
If a co-signer is an option for your bond, and your co-signer has a better credit rating than you, you'll probably get a better rate by adding the co-signer.
