How do I increase my bond capacity resulting in larger performance and payment bonds? This is one of the most common questions we get from our contractor clients. While it’s a straight forward question it’s not always a straightforward answer. This is due to the fact that a bond program is not a ‘one size fits all’ and ways to increase bond capacity could differ from contractor to contractor. However, there are some general improvements that every contractor can (and should) do that should result in additional performance and payment bond capacity.
How to Qualify
Before we begin, it’s important to understand how a contractor qualifies for a certain level of bonding. Why does ABC Construction have $3 million and bonding but XYZ Construction have $400,000? Bond capacity is determined around the 3 C’s of surety: character, capacity, and capital. Or in more layman’s terms, it’s the creditworthiness, experience, and financial wherewithal of the contractor. As such, here is what nearly every contractor can do to help increase bond capacity.
Do These Five Things
Keep money in company. You had a banner year, congrats! Your CPA gave you some tips on what you can do to minimize your tax liability and your spouse wants a new boat and car. It’s tempting to reap the rewards of business ownership but when it comes to surety credit, balance your tax planning with leaving capital in the business. Doing so will increase your cash, working capital, and equity positions, all resulting in a stronger balance sheet. Cash equals larger performance and payment bonds.
Strengthen internal controls/accounting. The next suggestion (#3) can also assist, but often times it makes more sense from a timing standpoint to have a quality controller or “controller/CFO for hire” help tighten up the company’s internal controls. Information is only as useful to a decision maker as the quality of the inputs, so investing in this not only gives the contractor more reliable numbers, it will give a level of comfort to the surety underwriter making the decision on whether or not to write the performance bond.
Hire a construction focused CPA. Construction is a different animal, and not all CPAs have a deep understanding of construction. Having this trusted adviser on your team is not a cost, it is an investment. Construction oriented CPAs cost more, but you will recognize the investment. They can help assist with stronger internal controls, higher quality presentation, and they will balance tax planning with profitability that satisfies the bonding company. A quality CPA will also work with your bond agent on what level of financial statement (compiled vs reviewed) is necessary for the bond program you desire.
Get (or increase) a BLOC. This is a Business Line of Credit. Once you have reinvested profits back to the company, cleaned up internal controls, and hired a high quality CPA, banks should be salivating to offer you more credit. How much? Depends on the bond program but as a rule of thumb – as much as you can get. The key is to only use it for emergencies. Any banker will lend you an umbrella on a sunny day, but it’s to be used when it’s raining! While a BLOC may not necessarily get you larger performance bonds, it will help when trying to stretch your bond program for that larger project.
Treat your surety and agent as a partner. A surety company is extending surety credit on behalf of the contractor, essentially a surety is its ‘backer’. Your agent is an extension of your company and needs to best represent you to the surety company. Construction is full of surprises, ups and downs, and challenges. If you have a business partner in your construction company you would discuss the ups and downs, consult each other on major decisions, and strategize for the future. If you treat your surety the same way – as a business partner – it will result in a much stronger, long standing relationship. One that a surety values and when the underwriter needs to make difficult decisions on bond capacity in good times and bad, they will likely make those decision for the benefit of their clients that have treated them like a true partner.
Start With a Surety Professional
The first step to increasing your bond program is to make sure you have a surety professional as your agent. A surety professional will consult on the best ways to get larger performance and payment bonds.
At Surety1, we are a bond only agency specializing in providing surety to support to contractors nationwide. Contact us today for a free consultation of your surety needs at 877-654-2327.