How to Increase Bonding Capacity

For existing clients, the 1 question we get most often is how to increase bonding capacity. And the answer doesn’t always provide the most clarity.  Though it’s an easy and fair question to ask, the answer can be complicated.  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 you get an answer that takes a list in a blog just to scratch the surface.  But here are some immediate actions to consider in order to increase bond capacity:

• Cash is king.  So we get that most people do not have piles of cash lying around. But with this in mind, you can make better decisions when faced with purchases, investments, and distributions.
• Reinvest profits.  Reinvesting profits into your business strengthens the balance sheet and should lead to a stronger healthier company.
• Don’t buy equipment or trucks.  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.
• Upgrade financial presentation.  Investing in quality internal controls shows your ability to manage cash flow, track profitability, and and manage jobs.  This investment will pay off not only with your bond company, but it makes your CPA’s life easier, which is a good thing since they are charging by the hour.
• Invest in a CPA reviewed statement.  Above about $500,000 it’s required by most surety companies.  So as a contractor if you are stuck under that due to your financial presentation, this is the quickest fix to increase bond capacity.
• Stay in your expertise.  Pursue jobs you are familiar with when increasing 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 comfort zone: with a project close to home with a class of work you can do in your sleep.
• Get or increase a business line of credit (BLOC).  An unused business line of credit will help increase bonding capacity.  In addition, it can help you through the ups and downs of cash flow and gives you that safety net should things get tight.
• Subordinate debt.  This just takes a short term note payable to a shareholder and converts it to a long term liability.  And the surety company has say on when the company can be back its obligation.
• 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
• Make sure your agent is a surety professional. Insurance and bonding are two different products with different levels of expertise. Make sure your agent isn’t an insurance agent that also does bonds.  Just like you’d want to make sure your bond agent doesn’t just also do insurance.  You want an expert.

We wish you the best in your efforts to increase bond capacity.  Obtaining larger bid, performance, and payment bonds hopefully leads to larger contracts and profits. If you have any questions about the above listed items, or other questions about how to increase bond capacity, feel free to call us any time.  877-654-2327.  We love to talk shop!