many businesses are struggling these days, and collection agencies are no exception.
However, unlike most businesses,
collection agencies face an additional
financial burden. In order to remain
compliant and operational, agencies
must secure and maintain statutory
surety bonds in the majority of states in
which they do business. This process
can be expensive and time-consuming,
especially if not done correctly.
Underwriting Focus
It’s important to understand that
surety bonds differ from industry to
industry, and the underwriting involved
is not constant. Most surety products
are geared toward the construction
industry. The performance bond
used for contractors is intended to
provide a guarantee that a project will
be completed as stipulated. When
considering the bond application,
the surety reviews the contractor’s
operations as a whole.
The majority of the current
statutory bonds required for collection
agencies provide a recourse to your
clients should you fail to remit the
funds you have collected on their
behalf. Commercial surety bonds focus
on funds, so the underwriting involved
narrows drastically to the agency’s
cash flow, financials and those of their
owners. Your statutory bonds are truly
an extension of credit. Much like a
loan, terms and conditions surrounding
the amount of credit afforded to you
rely on your ability to “repay the
loan” or, for bonds, your ability to
indemnify the surety in the event of
a claim. Unlike insurance, surety is
underwritten in anticipation of zero
losses, so the premium charged is not
in light of the potential exposure but is,
instead, a service charge.
Prepare with Insight
Sureties annually review the
financial statements of the agency and
any individuals that were included on
the indemnity agreement put in place
when the bonds were first written. The
submission requirement for financials
may differ, as sureties will sometimes
provide agents and/or representatives
underwriting authority up to a certain
bond aggregate for each agency.
A few circumstances may trigger
an interim financial review, including
questionable answers provided in new
bond applications, a drastic increase
to the current aggregate or a request
for a more vulnerable type of bond.
Blanket bonds, for example, apply to all
jurisdictions—including those without
their own statutory requirements—and
are not client specific, so they see a
higher frequency of claims.
Additionally, statutes and bond
language in some jurisdictions have
created a higher frequency or severity
of bond claims, so where you do
business may also trigger a financial
review. Before you expand into other
states, it’s important to review the
statutes to determine if there are any
issues surrounding the current bond
language and its application.
Many agencies wonder how the
surety’s review of financials differs from
that of a traditional lending institution.
Sureties are unsecured lenders, and
their approach is conservative. They
tend to focus on the success of your
business. For collection agencies,
liquidity is vital because sureties
consider the funds you hold in trust for
your clients.
Agencies sometimes run into
problems when they do not adequately
consider their bond requirements when
entering into a new business venture.
Servicing new clients may require
significant upfront investments, which
can affect an agency’s financials. This
may include a large client-specific
(contract) bond that significantly
increases the amount of credit to be
extended. If an agency’s financials
were already stressed, this could prove
problematic with its surety. It’s vital to
determine in advance if your agency
would qualify for the additional bond
limits or if the investment would
somehow place your financial standing
in a negative light with the surety.
Be a Partner in the
Underwriting Process
When agencies run into difficulties,
it’s important to open up the lines
of communication with your surety.
Additional information may assist
with the overall picture presented. For
example, your business plan for a new
venture or plans to pay down corporate
debt may be viewed very positively
