We get the question all the time, “How do I increase my bonding capacity?” While there are several answers to this difficult question, here are 10 things a contractor can do to increase bonding:
1) Keep or Get Your Personal credit clean. Hopefully it’s clean. If it is, a contractor will always be able to get some level of bonding. And excellent credit just speaks to the character of the contractor. If it’s damaged, order a credit report when you are done reading this. Find all the past due items and pay them off. If you have a loan modification, foreclosure, tax liens, or bankruptcy consult your bond agent first, who will advise the next step.
2) Keep money in the company. Avoid the temptation to take a large withdraw to reward yourself for the fruits of your labor. Re-investing in your company keeps your balance sheet strong, and thus your bonding.
3) Keep cash. Unless necessary, do not buy vehicles or equipment. Cash is king. With this in mind, you should develop a strategy for staying ahead of billings, collections, and paying APs.
4) Upgrade financial presentation to a CPA Reviewed financial statement. Most small contractors are hesitant to pursue this when they see the price tag of $6k to $10k annually, but the result is larger bonds at a lower rate. You should always consult your bond agent FIRST before upgrading.
5)Upgrade your internal accounting software. A construction based software that ties in job costing to accounting will pay dividends. Not only will your bond company love getting an interim financial on a percentage of completion basis, you will be able to manage jobs more efficiently…and profitably.
6) Subordinate shareholder debt. If you loaned the company money, subordinate the debt. It transfers the money owed to a long term liability, rather than a short term liability.
7) Open a Business Line of Credit. This should be easy to do once you have a nice new CPA Reviewed financial statement. A line of credit should be only used as a safety net and instantly provides more working capital to complete jobs.
8) Stay in your geographic region and in your expertise. Trying to push your bonding capacity should be done with projects you are familiar with, in a normal geographic region. Trying to venture into new areas? Do that with small ‘test’ type of projects.
9) Be an open book. Being on the same page with your surety agent and surety company underwriter is more valuable then you think. It adds a level of comfort that will help stretch a bond program.
10) Bond back subcontractors. As a GC, requiring that subcontactors bond back to you mitigates some risk and should result in a larger bond program.
There are other avenues not mentioned such as the SBA, collateral, and funds control, which can all serve a purpose in a certain scenario. At the end of the day, run your business like you want to sell it to an investor and you’ll see your bonding rise!