If you’re in the market for a Contractors State License Board (CSLB) bond, then you probably already understand the difference between a surety bond and insurance. Bond rates vary from 1% to 15% and that can mean some significant savings, if you get a lower bond rate. Unlike insurance, there are some factors within your control to allow you to get the lowest rate for a CSLB bond.
Risk = CSLB Bond Rate
Unlike insurance, where probabilities of incidents are the determining factor for insurance rates, the only factor for bond rate is risk. Construction bonds are always riskier than, say, a mortgage broker or insurance agent, because there are plenty of instances when projects are not completed which can leave customers unhappy and, more importantly, contracts broken.
Have Good Credit
The easiest, and arguably, the most accurate determinant for risk is looking at one’s credit score. The higher your credit score, the lower the risk to the surety company, thus a lower bond rate. If you have a low credit score, the quickest way to raise it is by doing the following:
- Pay off any tax liens, judgements, or any outstanding familial support payments.
- Keep all of your credit card balances below 30% of the limit.
- Always pay on time and well above the minimum payment due.
- Don’t open any new lines of credit until you have paid off your older lines.
Beef Up Your Company’s Financial Profile
Once all of your credit is paid off (or at least low enough to not trigger any credit warnings), you’ll want to make sure that you have sufficient working capital. In the construction industry, it’s not always easy keeping large amounts of money on hand since supplies and subcontractors need to be paid, whether or not you’ve been paid. An efficient way to do this is to turn your short term debt into long term debt. Short term debt (anything due within a year) reduces your working capital which can negatively impact your perceived risk.
Each surety company will have different experiences with each of the varying specialities. Say, for example, a surety company had several claims with HVAC specialists, then they will have a higher rate for HVAC companies that want to get bonded. However, the next company may have had more claims with solar contractors, so their rates for HVAC would be lower, but higher for solar. The best way to ensure you’re getting a good rate is to shop around. A smart way to do this is to use a broker that can shop the rates for you.