Updated: Sep 15, 2020
From new and existing clients, one of the key questions we get is how do I increase my bonding capacity. And the answer isn't always that simple. This is because no two contractors are the same, and no two contractors have the same circumstances. Combine that with the fact there are many different surety companies, all with different appetites for risk, and underwriting criteria. Below are some points of consideration to attempt to do so:
Growing your cash reserves on your balance sheet. Sometimes this is accomplished by thoroughly thinking through purchases, investments, and distributions.
Investing in the company. Reinvesting profits into your business strengthens the balance sheet from a net worth perspective.
Carefully considering any purchases of equipment. Consider renting, or long term lease options for equipment. While it’s nice to have your own equipment it can put a strain on cash flow.
Investing in quality internal control software. Investing in quality internal controls shows your ability to manage cash flow, track profitability, and and manage jobs. Of course this requires proper training of key persons as well as staff.
Choosing an Accountant. Above $2,000,000 single project having a CPA reviewed financial statement is mandatory for most sureties. But as importantly choosing a CPA who is very familiar with construction accounting can be key, to presentation to a surety. So as a contractor if you are stuck at a lower capacity due to your financial presentation, this is the quickest fix to increase bond capacity.
Stay in your scope of work. Pursue jobs you are familiar with when attempting to increase capacity. If you do fiber optic installation, you don’t want to stretch your limit in a job outside your expertise. Stretch your bonding capacity in your familiar geographic area, with a project close to home with a class of work that is second nature to you.
Get or increase a bank line of credit (BLOC). An unused business line of credit will help increase bonding capacity. Attempt to do this when business is good, so the line is there to fall back on when the banks tighten up.Subordinate debt. This just takes a short term note payable to a shareholder and converts it to a long term liability. This comforts the surety as they are able to address the terms of when the obligation is paid back, hence improving your risk picture, short term.
Give your agent timely financial information. Having current information is critical when trying to increase bond capacity. Think of your surety as a business partner. By keeping them informed of changes and up to date to financial performance, it increases the trust level, and hopefully your bond capacity.
Get a bond only agent. Insurance and bonding are dynamically different products which require a unique understanding of the markets differences. Make sure your agent isn’t an insurance agent that will just help you get a bond.
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