Why does the bond carrier underwrite me personally when my bond covers my company?
Because the majority of licensed businesses are closely-held, meaning they are each owned by either one individual or a very small group of individuals who are often intricately involved in the business itself, it is usually quite difficult to disassociate the financial success and stability (or struggles) of the business from that of its owner-operator(s).
How does my personal credit affect the ability of my company to be bonded?
If there are problems in the owner’s personal life (such as an over-extended lifestyle reflected in too much debt, health challenges reflected in unpaid medical bills, lack of attention reflected in late payments to creditors, etc.) that reach the point where they impact his or her personal credit condition, that scenario can be a leading indicator of increased pressure on the business to provide the financial support for the owner’s personal problems in spite of whether it is in the best interest of the business itself to do so. It can also provide a perspective as to the owner’s personal financial responsibility with the correlation that how he or she manages the financial affairs of the household is often indicative of the approach or tolerance applied to the business.
Conversely (and retrospectively), problems in the business can have an indirect effect on the owner’s personal credit in situations where the owner increases personal debt or reduces personal income in order to support the business. The personal finances of the owner-operator are often available as a safety net for the business in the event the business is not healthy enough to support itself.
A poor personal credit condition alerts the surety that the risk may be higher than average. The bond underwriters may apply conditions to the approval (such as non-standard premium rates or even collateral), or they will often simply decline to bond that company and wait to pledge their capital for a less-risky principal instead.
Mason Grashot, CPA is president of The Bond Exchange, a national insurance agency focused on surety bonds with a unique specialty practice centered on the mortgage profession. As the endorsed strategic partner of NAMB—The Association of Mortgage Professionals, The Bond Exchange services thousands of surety bonds through programs designed specifically for the mortgage industry. For more information, call (501) 224-8895 or visit www.thebondexchange.com.