If you have declared bankruptcy, it can make obtaining a surety bond more difficult. Even with a relatively low credit score of 650 or below, you may face difficulties obtaining a surety bond. However, these obstacles don't mean that you should give up. Whether you have a bankruptcy or a less than perfect credit score, there are things you can do to improve your chances of being approved for a surety bond.
Here are five ideas to consider:
1. Transfer ownership of the company to a partner
If you have a sole proprietorship company and you are using your personal credit history (rather than a business credit history) to apply for financing and bonds, consider selling your business. As a sole proprietor, you have the right to transfer ownership to anyone including a partner or even a spouse or child.
If the business applies for a loan or a bond after you have transferred ownership, the new owner's credit score will be considered rather than yours. To ensure that you keep earning money from the business, you can create an employment contract that maintains your salary or interests in the business's profits.
2. Restructure your business
Instead of selling your business and staying on as an employee or spouse of the owner, keep the business and restructure it. If your business is a partnership, an LLC or a corporation, your personal credit details are not included on your business credit report, and your business debts are not recorded on your personal credit report either.
However, that doesn't mean that you are absolved of the responsibility of your business debts. If your partnership or LLC goes bankrupt, you may be held personally liable for any of the debts that aren't covered by your business assets. If that happens, you may get reports of those debts on your personal credit report.
Setting up an LLC is a relatively simple matter. Many states have internet portals where you can download the forms, and the filing fees only range from $100 to $800. Then, obtain an EIN (Employee Identification Number) from the IRS.
3. Learn how to establish a business credit profile
Once you have established an LLC, it's time to work on creating a business credit profile that is distinct from your personal credit report. To do that, focus on obtaining lines of credit that are only linked to your business. Keep in mind that business loans often require detailed business plans.
4. Work on improving your business credit profile
If you already have a business credit profile or if you are just trying to build up your profile, focus on paying all of your bills on time and keeping your debts low. However, you also need to make sure that your credit profile is being updated accurately.
If you have lenders or suppliers who are not sending reports of your timely payments to the credit profile agencies, talk with them and convince them to update your report. Monitor your report, as well, to ensure it accurately represents your company.
5. Consider high risk surety bonds
If you have a bankruptcy or a low credit score, you don't necessarily have to wait for months or years as you work on establishing and improving your credit. During that time, consider applying for high risk surety bonds. To mitigate the risk of working with financially risky business owners, bond underwriters may increase the prices of surety bonds for high risk lenders.
Although you may pay more upfront, a surety bond allows you to apply for certain types of contracts, and that makes the extra cost worth it. Essentially, without a surety bond, you won't have the chance to get a great contract so that you can repay debts, improve your credit and eventually obtain a surety bond that is not designed for a high risk client. You can obtain a surety bond from a company like NFP, P & C, Inc.