The Impact of Credit Scores on Surety Bond Premiums

How Does a Surety Company Determine Bond Premiums?

Surety companies assess a business' risk before issuing a surety bond. Key factors that influence bond premiums include:

1. Credit Score

   The principal's credit score is one of the most critical factors in determining the surety bond premium. Sureties analyse the credit score to evaluate the principal's financial stability and risk level.

   
   

   A higher credit score indicates lower risk when issuing a surety bond, attracting a lower premium.

   
   

   On the other hand, principals with lower credit scores are considered high risk, often leading to securing bonds at a high premium. Checking the principal's credit score and history is a routine part of the application process for surety bond issuance.

2. Business Financials

   In addition to credit scores, the overall financial stability of the principal is crucial. Surety companies review financial statements, including overall revenue over the past few years, assets, liabilities, and cash flow statements. 

   
   

   Businesses with a healthy financial profile, good cash flow, and ample assets are less likely to default on their payments. For this reason, they are offered surety bonds at a lower premium. However, financial instability can result in higher premiums.

3. Risk-based on industry

   When providing a surety bond, the company also assesses the industry in which the business operates. This gives the surety company a broad understanding of the industry's risk, which also influences the bond amount and premium cost.

4. Past bond and claim history

Another factor influencing surety bond premiums is the principal's experience and reputation in the industry. Surety companies prefer principals who have a proven track record of successful project completion and are, therefore, likely to be more reliable.

For example, a construction contractor with several years of experience and a history of timely project completion is more likely to secure a surety bond at a lower premium.

Why does Credit Score Matter for Surety Bonds

Why does a credit score matter when securing surety bonds? Let's simplify it for you.

A strong credit score is a primary factor in determining the premium rate and bond eligibility. Therefore, people and businesses with higher credit scores can generally secure bonds at much lower rates.

Surety companies also evaluate the principal's creditworthiness to gauge their likelihood of defaulting on their obligations. They use credit reports to assess payment history, debt-to-income ratio, bankruptcy, and liens.

Credit scores act as a risk indicator guiding surety companies.

• A higher credit score suggests financial responsibility, reducing the surety's risk.
• A lower credit score signals potential financial instability, leading to higher premiums.

How Credit Score Affects Bond Premium Rates?

The credit score of a business or individual typically determines their creditworthiness.

Here's what credit scores mean for premiums and interest rates in India:

Ways to Improve Your Credit Score to Lower Bond Cost

If you are unsure of your credit score or wish to improve it before securing a surety bond, here are a few tips to help your business improve your credit score and history and lower bond costs: 

• Pay Bills on Time

The first and foremost thing to focus on when trying to improve your credit score is paying your bills. If you have missed an EMI for an existing loan or credit card, get that sorted as soon as possible. It helps to set reminders for your payments and discipline yourself with credit.

EMI payment delays attract penalties and lower your credit score. So, if you want to improve your CIBIL score, pay your dues timely and get a good credit score.

• Reduce Outstanding Debt

Clearing outstanding dues is an effective and quick way to improve your credit score for low bond costs. Not clearing your dues in time can accrue costs, negatively impacting your credit score.

• Check Credit Reports for Errors

There is a slight chance that your business credit score may have errors. It always helps to check your credit reports for errors to ensure your credit score is accurate and can help you secure a bond.

• Establish a Good Credit History

When underwriters evaluate your business for a surety bond, they closely examine your credit history. Late or missed loan repayments can signal financial instability, leading to higher bond costs. 

To improve your creditworthiness, focus on repaying existing loans on time and maintaining a consistent payment record. A solid credit history not only helps lower bond premiums but also strengthens your business's financial reputation.

Alternative Options for Low Credit Applicant

Businesses often are unable to secure a surety bond or one for a lower premium. Fret not! Here are some alternatives you can explore:

• Collateral-based bonds – If your business has ample assets or cash that can be used as collateral, you can secure a collateral-based bond and improve your chances of approval.
• Co-signers or indemnitors – A financially strong co-signer can enhance your application by assuming shared responsibility for the bond.
• High-risk bond providers – Some providers specialise in working with applicants with low credit, though premiums may be higher.

Wrapping it Up!

A business's credit score is a major contributing factor to its creditworthiness and is routinely evaluated by surety companies before issuing a bond. A strong credit history can reduce costs, making obtaining the necessary bonds at a lower premium easier for your business.

If your credit is less than ideal, don't be discouraged! There are alternative options available. By actively monitoring and improving your credit, you can increase the chances of securing bonds at a more affordable cost. Also, maintaining consistent financial stability can help your business secure bonds in the future.