Bonding is the lifeblood of any contractor performing work for any governmental agency, or government-funded project. It is also becoming a more common requirement for private jobs. However, as the economy dove headfirst into a recession, the bonding market tightened. The issue at hand is the nature of bonding. Surety bonds may not be a secured product, and in the event of a default on the part of a contractor, the surety companies rarely come out ahead in the end.
Combine the recession’s effects on contractors’ financial results with the amount of surety bond defaults (which were climbing even before the recession began) and you are left with a less than optimistic underwriting environment. The tightening of the credit market for bank lines of credit and term debt (both secured products) has created a domino effect. As access to capital (one of the three C’s in bonding along with capacity and character) has dried up, so in turn have the surety companies reduced the amount of bonding available to their clients.
One avenue that contractors should be willing to explore is non-standard (subprime) bonding. While the phrase “subprime” has become a four-letter word to the average reader, most if not all financing and insurance products have a subprime market of some sort. Subprime bonding often can be used as a replacement of traditional bonding markets.
To read why a company would choose subprime bonding, click here to read an article from Builders Exchange Magazine.
For more information on subprime bonding, post a comment below or contact our Real Estate & Construction Group at 440-449-6800.