Build Bonding Capacity with Tried and True Methods
by
Member of the Firm
Is there enough bonding capacity to go around? For most contractors, the answer is “yes,” but bonding companies are very careful in taking on bond business. How, then, can you convince sureties you are worthy of bonding?
A changing environment
In the flush surety market of the mid- and late-1990s, contractors could obtain surety bonds without much difficulty. Subsequent years of record losses and the aftereffects of the Sept. 11 attacks, however, took the sizzle out of bonding. As a result, sureties clamped down on their underwriting policies, reduced bonding capacities and became more selective about the contractors to whom they offered bonds.
So where does that leave you today? Most bonding companies are publicly traded and, therefore, must produce positive results for shareholders. Their underwriting reflects this responsibility. As a result, sureties want to know that your company is well managed, profitable and trustworthy. Contractors that fit this profile have a wider window of opportunity to either obtain or increase their bonding capacity.
Under the microscope
You must give sureties accurate and timely financial information to help them develop a solid, well-rounded understanding of your business. Expect to provide extensive documentation in such areas as company history, work records and work in progress, along with budgets and financial statements that go back as far as five years.
Bonding companies may also want to see resumés of your key managers, plans that show how your organization will avoid or minimize unexpected disruptions (such as strikes or seasonal fluctuations) and other documentation that supports the longevity of your construction firm. Don’t be surprised if sureties also interview subcontractors, suppliers and current and former customers about their dealings with you.
Winning strategies
There are strategies you can follow to give sureties the best possible view of your company. Try the following back-to-basics suggestions to help get the bonding capacity you need:
Maximize year end cash. Showing substantial cash balance in your financials can impress an underwriter. To this end, consider deferring payment on accounts payable or speeding billings for accounts receivable to improve year end cash balances.
Emphasize working capital. Bonding agents particularly look for working capital, which is current assets minus current liabilities. As a general rule, sureties believe that contractors with higher levels of working capital have a better chance of successfully completing their contracts.
Demonstrate the ability to estimate accurately. Sureties will require a schedule of your contracts in progress and completed contracts. Any projects from a previous year that were estimated to generate large profits but ended up in the current year with a reduced profit will be questioned.
Bonding benefits
Better bonding capacity allows you to pursue larger, higher-paying jobs. Bonding can also enhance your borrowing capacity because creditors know that a qualified surety is reviewing your financial statements and company history. When these rewards are up for grabs, you can’t afford to overlook the fundamentals.