How to Get Bonded With Bad Credit
Expert offers a six-point checklist for dealers who bring past credit challenges to the surety bond application process.
October 2016, Auto Dealer Today - WebXclusive
Photo: Kevin Cabral
Problematic finances can be a real obstacle to your dealership’s development. One of the biggest issues dealers with bad credit face is obtaining the auto dealer bonds they need. You may need to pay a much higher surety bond price for bad credit auto dealer bonds, if you manage to get them at all.
The auto dealer bond is a strict requirement for getting a dealer license in most states. If you are not able to get bonded, you could be out of business. But there are still ways in which you can improve your situation and get bonded, even at a lower price. Let’s review the six most important tips for obtaining your bond with bad credit.
1. Make Your Credit Report Spotless.
When you apply for a surety bond, the first financial factor your surety will consider is your credit report. However, the credit score is not the only criterion. The rest of your report can be just as important as the score. That’s why it’s important to take care of any public records before applying for a bond.
This means cleaning up any collections, judgments, or liens you might have pending. You may find that a spotless report with a lower credit score can be seen as more favorable than a high score with numerous hanging records.
2. Select Your Business Partners Carefully.
If you haven’t set up your business entity, it’s wise to think twice about who your partners will be. When your surety’s analysts examine your business and its financial profile, they will take a close look at every business owner. The goal of this assessment is to identify any weaknesses which might pose a risk of nonpayment on bond claims and defaults.
If any of your partners are seen as posing a higher financial risk, many sureties will consider that a serious problem. This might lead to a higher surety bond cost or an outright rejection of your bond application.
3. Showcase Your Professional Experience.
Create a résumé and attach it to your application. The longer you have worked in the dealership space, the more likely you are to be seen as trustworthy — especially if you don’t have a track record of triggering claims or other problematic situations. If you are relatively new to the business, highlight any related professional experience and training, and be prepared to discuss it with your surety agent.
4. Prove Your Financial Strength.
If your credit is problematic, having considerable liquidity and assets can greatly help during your bonding process. Both can be seen as evidence of your financial strength. If you have uncollected debts, it’s a good idea to collect them before you submit your bond application.
If you have other assets, showcase them. For example, if you own a home, this means that you obtained a loan from a bank that assessed you as a low-risk applicant. If your mortgage payment record is spotless, this also illustrates to your surety that you are a diligent payer.
5. Provide Proof of U.S. Citizenship.
If you are not a U.S. citizen, it’s a good idea to take legal steps toward obtaining it before applying for a bond. Showing proof of citizenship can be crucial for getting bonded. In some cases, sureties are unwilling to provide surety backing for non-U.S. citizens. They know the legal formalities can complicate the claims process. They also recognize the risk that the bonded parties will not stay in the country to repay their debts.
6. Choose Your Agency Wisely.
Last but not least, the surety bond agency you select can also make a huge difference in your bonding process. Bonding companies do not operate directly on the market, so agencies are the intermediary between your dealership and the bond underwriter.
What’s important to look for in a surety agency? It should work with A-rated and T-listed surety bond companies. This guarantees the security of your bond backing. The more partners your agency has, the larger its network, and the better equipped it will be to negotiate good bonding rates according to your specific circumstances.
While getting bonded with bad credit can be a daunting task, there are shortcuts to making these difficult situations better. What is your experience with bad credit bonding? Do you have advice for fellow dealers? Please share your insights in the comments below.
Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping auto dealers get bonded and start their business. Contact him at [email protected].