If you’re a contractor, small business owner, or license applicant, you typically must get a surety bond. But you might be wondering: Does obtaining a surety bond affect your personal or business credit? The short answer: Typically, it’s a soft check, but it may impact your credit, depending on the type of bond, your provider, and how your application is structured.

In this article, we’ll break down the types of surety bonds contractors need, when and how a surety bond can impact your credit score, what underwriters look for during the bonding process, and tips for minimizing any potential effect on your financial profile. We’ll also cover how CCIS helps you navigate bond requirements with transparency and efficiency, without unnecessary hits to your credit. Throughout this article, we’ll link to relevant CCIS bonding resources and guides to help you better understand your options and make informed decisions.

Why a Contractors License Bond Is Typically Required

As a contractor, depending on the state in which you work, you are required to obtain certain surety bonds. To perform construction work, many state licensing boards or other government agencies require contractors to obtain a License Bond. For example, in California, the Contractors State License Board (CSLB) licenses and regulates contractors within the Golden State, requiring them to file a $25,000 Contractor License Bond to maintain an active license. In the state of Washington, general contractors are required to obtain a $30,000 License Bond, while specialty contractors are required to obtain a $15,000 bond.

A Contractors License Bond serves as a financial guarantee that a contractor will operate its business in compliance with local laws, regulations, and the terms of its license. The bond must be issued by an insurance carrier known as a “surety company” or a “bond company.” The contractor is referred to as the principal, the surety bond company is the obligor, and the entity requiring the contractor to purchase the bond is the obligee.

Whom Does the Contractor License Bond Protect?

The surety bond protects consumers, employees, and the state. If a contractor violates regulations (for example, performs defective work, fails to pay suppliers, or violates labor laws), the injured party can make a claim against the bond. Unlike insurance, the contractor (not the bond provider) is financially responsible for the claim and must reimburse the surety company if the surety must pay out on a claim.

The Contractors License Bond demonstrates to clients and regulators that you are financially responsible and compliant. Moreover, many states won’t issue or renew a contractor license without proof of a bond.

What Do Underwriters Look for in the Contractor License Bonding Process?

Underwriters will perform a credit report, as the contractor ultimately must reimburse the surety company in the event that any claims are paid on a bond. Underwriters also look at the following:

  • Contractor’s financial strength: This includes current financial statements, bank records, and proof of working capital, which may be reviewed to ensure the contractor can handle obligations and unexpected costs.

  • License and compliance history: A clean licensing history with no past violations, claims, or bond cancellations strengthens the application. Any prior bond claims or regulatory issues may raise red flags.

  • Bond amount and state requirements: The required bond amount, which varies by state and contractor classification, can also affect underwriting. Higher bond amounts often require a more detailed financial review.

  • Type of work performed: The nature of the contractor’s work (e.g., general construction vs. roofing or electrical) may impact the risk profile, as some trades carry a higher likelihood of claims.

Inside the Credit Check for a Contractors License Bond

The credit check is a soft check, which will not impact your credit score. The credit check helps underwriters assess risk and determine the bond premium. Poor credit may result in higher costs. The good news is that CCIS works with several surety bond companies that have varying risk appetites, allowing contractors with poor credit to obtain the bond at the lowest rates available on the market.

It’s essential to note that if a contractor defaults on the bond obligations or a claim is paid out by the surety this may be reported and negatively impact the contractor’s credit standing.

Additionally, if a claim is made against the bond and the contractor fails to reimburse the surety company for the payout, it may be sent to collections and reported to credit bureaus, negatively impacting the contractor’s credit.

What Other Types of Surety Bonds Are Contractors Required to Obtain?

Contractors are also typically required to obtain Bid, Performance, and Payment Bonds. A Bid Bond guarantees that a contractor who submits a bid on a project will enter into the contract and provide the required performance and payment bonds if the job is awarded. It protects the project owner from contractors who submit low bids and then back out of the project.

A Performance Bond ensures that the contractor will complete the project per the contract’s terms and specifications. If the contractor fails to perform, the bond provides financial compensation to the project owner. 

A Payment Bond guarantees that the contractor will pay all subcontractors, suppliers, and laborers associated with the project. It protects those parties from non-payment and helps avoid liens on the property.

Do These Bonds Require a Credit Check?

Bid, Performance, and Payment Bonds typically also require soft credit inquiry, which won’t impact your credit score. There may be cases where the surety company could require full financials, personal or business, in order to obtain the bond.

Surety companies are looking for good to excellent credit scores, with no tax liens, judgments, bankruptcies, or past-due accounts. If the credit report reveals negative activities, a contractor may still qualify for a surety bond with assistance from the Small Business Administration (SBA) by providing collateral or establishing fund control. CCIS can assist you with obtaining a bond with the SBA.

For larger bonds or higher-risk applicants, a hard credit inquiry may be used, which can temporarily lower a credit score.

Again, if a bonded contractor fails to fulfill its obligation and the surety has to pay a claim, the contractor must reimburse the surety. If it doesn’t, the unpaid amount can be sent to collections, which can have a severe impact on credit.

Frequently Asked Questions

Q. Does getting bonded affect my credit?

A. Typically, the credit check is a soft check and won’t impact your credit score.

Q. Can I qualify for a surety bond with bad credit?

A. CCIS works with several surety bond companies that have varying risk appetites, allowing contractors with poor credit to obtain the bond at the lowest rates available on the market. Also, If your credit reveals negative activities, CCIS can help you get a bond from the Small Business Administration.

Q. Will a claim on my bond impact my credit score?

A. If a claim is filed against the bond and the contractor fails to repay the surety company for the amount paid out, the debt may be sent to collections and reported to credit bureaus, which can harm the contractor’s credit score.

Note: Please note that bonds are subject its terms and statutory requirements.  Thus, benefits of the bond can only be afforded based on the terms of the bond and as provided by appliable state or federal law.