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Understanding the Surety Bond Business and the Bonding Process

Mark Rader April 25, 2012

A surety bond is nothing more than a third party guarantee of an obligation between two other parties. The majority of surety bonds guarantee performance of a contract and/or payment of monies legally owed to others. Sounds pretty simple right? Well, not really. When we are asking a surety company to guarantee millions of dollars of risk, it is critically important how we approach the bonding process in order to achieve success.

When you think of surety bond, think of banking, credit analysis, knowledge and trust. What a bank loan officer does when reviewing your account is about the closest thing to what a surety bond underwriter does when evaluating your business and the bond obligation(s) he is considering. Surety bond underwriting is, at the heart, a credit function. Yet there are many subtle differences that make surety a unique, and sometimes frustrating process for many businesses.

At the end of the day, surety bond underwriters just want to sleep tight and not worry about your deal going south on them. A surety simply wants to feel comfortable that you will complete all of the bonded obligations they agree to stand behind as a guarantor. So first they have to be able to make sense out of your business, both financially and operationally, and to do that they need to know certain things (that you know) on an intimate level. On far too many occasions, a good business will not receive a surety bond it deserves because the proper translation of your business finances and operational characteristics to a surety does not take place. So why does this happen?

A bad surety deal (or no surety deal) is many times the result of a surety broker that is “in over his head,” and thus lacks the experience and understanding to handle a more complex situation. It can easily happen when a business owner does not understand how the surety business operates and how the bonding process works, and puts their trust in a broker that is not highly qualified to manage the business’s particular surety needs. But it can also happen because business owners generally do not think like surety underwriters, and surety underwriters generally don’t think like business owners. The crux of the matter is that critical information gaps on both sides need to be properly bridged by the surety broker.

Different surety companies have different underwriting standards and appetites for risk. However, any individual surety underwriter putting a deal together essentially needs enough positive analysis, information, and terms, to feel like he has a “no risk” deal. Yet a business owner is taking risk all the time (24 / 7) and may have difficulty appreciating the underwriter’s need to feel like they have a no risk deal. This gap can be bridged when we properly bring the surety underwriter and business owner together, by concentrating on sharing the right information with each other, but also in the right order. This is the tricky part however, because information sharing and proper understanding from both sides can quickly go down the wrong track if the bonding process is not properly guided at the outset.

The business owner (broker’s client) needs to first understand what is important to a surety underwriter, and why, based on what a surety is going to be asked to consider. Once the broker has achieved that understanding with his client, the surety broker can then present relevant information about the client’s business in a way that meets the needs of the surety, assuming the deal is truly bondable from an underwriting standpoint. The key is that all of this understanding needs to be figured out before the client is presented to the surety for underwriting. First impressions are critically important in the surety business, and this is where the expert surety broker earns their stripes in the bonding process.

Every business is different however, so there is no “cookie cutter” approach to follow when making the financial and operational presentation to a surety. This is why you need an experienced surety broker who understands how the surety business operates and how the bonding process works. Your broker should have very deep knowledge of the surety industry, and understand how to present a deal to a surety, combined with a strong reputation for trust and due diligence from surety industry decision makers who can approve their deals. When both the client and surety broker truly understand the inner workings of the surety business, you are poised to achieve success.

If you’d like to learn more about the surety business, surety bonds or the bonding process, please contact me by calling 216-367-8082 or email me at