Although bonding companies consider a contractor’s history and reputation in determining bonding capacity, the primary underwriting emphasis is on your financial picture. A bit of year-end planning now could have a significant impact on how much work you can bond. Increase Your Working Capital A general rule is that your available bond credit is 10 to 20 times your working capital. Enhance it by:
- Making certain any billings that can be invoiced prior to year-end are invoiced
- Stepping up collecting invoices before year-end to increase your cash
- Keeping underbillings less than 25 percent of your working capital
- Keeping overbillings less than 30 percent of your net worth
- Eliminating as many intercompany transactions as possible, especially if you have several entities but don’t consolidate them all on financial statements
Build Your Equity While most bonding companies use working capital as the primary indicator of bond credit, they also examine your net worth. Typically, the largest part of equity is retained profits. Build them by:
- Reducing payroll bonuses to owners for S-Corps and Limited Liability Companies. By reducing bonuses, distributions can be made after year-end to fund the personal tax obligations of owners
- Closely examine your work-in-progress schedule so you can accurately recognize job profits
- Pay down some of your debt
In General
- Call your CPA now to encourage them to produce your statement before the tax season
- Avoid surprising the bonding company with large, unexpected equipment purchases
- Keep your reference file updated by obtaining letters from happy owners and/or general contractors
- Don’t sacrifice bonding capacity in favor of avoiding taxes. If at all possible, try to show some profit
- Work on your company and personal credit history
- Conduct a meeting with your bonding agent, CPA and banker to review your draft statements before your final financial statements are prepared
If You Think You Can’t Get A Bond
The last few years have decimated a lot of balance sheets. But even if you are a bit “underwater” on your equity, bonding is available if you have an established track record. Some bonding companies offer funds control and partially-collateralized contracts as ways to write bonds. The Small Business Administration is another option. Not only have they expanded capacity and eliminated a lot of paperwork, they’ll consider any unused part of your bank line of credit as actual working capital. “Streamlined” bonding programs are available on contracts under $500,000 and are based solely on your personal credit history. Some companies also offer bonds up to $1 million without having CPA-prepared statements. One Final Word Beehive Insurance represents several bonding companies, and has bonding agents with decades of experience. Call us if you have questions or concerns on your bonding program.