Surety bonds, specifically bid, performance and payment bonds, are the lifeblood of a public works contractor. Surety bonds are required under federal and state law whenever public funds are being spent. Bond capacity is based on the credit worthiness of the contractor. This would include personal and business credit, assets, liquidity, experience, among other things. When things are rosy, bonding is easy. However, life isn’t always rosy nor is business.
Meet Jane Contractor, a real contractor who’s name is fictitious for the purposes of this article. Jane was humming along 2017 and 2018, when a personal hardship led to a business hardship. Divorce. Not only did Jane’s personal life get turned upside down, but her personal credit took a hit when she learned her soon to be ex-husband had stopped paying any bills. On top of that, once the divorce finalized her personal worth was half what it was.
By the end of 2018, her bond capacity shrunk from some $3 million in aggregate bonding to $400,000 for a single job size and $800,000 in aggregate. With a business to run, salaries to pay, and open jobs, this reduction in bond capacity was having a real impact on Jane’s business. Luckily for Jane, she communicated timely with her agent, Surety1, and devised a plan. The plan included several moving parts including working with her bank, CPA, and surety company to get bonding back to the level Jane needed for her company to successfully operate.
The game plan was set. It included 3 critical strategies.
It’s smart for any contractor to have a business line of credit (BLOC). A BLOC should be opened and used for times of need for cash. Unfortunately for Jane, one bad job led to a cash flow pinch and her divorce exasperated the problem when she had to settle and got behind on bills. With the company’s working capital at near $0, the surety company has not willing to support much of a bond program.
Surety1 analyzed the balance sheet and saw a maxed $250,000 line of credit. Since a BLOC is a current liability it impacts working capital, and in turn, bonding. We called the banker and explained that the best way for Jane Contractor to pay the bank back was to get more public works. In order to do that we needed more working capital. The bank termed out the $250,000 line of credit to a 5 year note. This moved about $200,000 of debt to a long term liability, since only the portion due within a year is considered current. This instantly increased working capital by $200,000.
Though the past due bills were caused by Jane’s ex-husband, the credit cards were in her name. This means it’s Jane’s problem. Understanding the importance of clean credit, Surety1 advised Jane to pay the past due bills, which has a huge negative impact on credit. Though late pays that are now current still hurt your credit score, it’s much better than being currently past due.
The surety relationship is usually a long standing one. However, depending on circumstances sometimes the best move is moving to a new more flexible surety company. In the case of Jane Contractor, this was the best course of action. Surety1 placed the contractor with a surety that was able to offer a standard $1 million bond single and $2 million bond program. Further, the surety agreed to support $2 million single and $4 aggregate with the use of funds administration, a tool to help contractors with blemishes get more bonding. Having the resources of 20 different surety companies, Surety1 was able to provide the best solution for this contractor’s unique situation.
There is no one-size-fits-all approach to bonding. Each contractor has a unique story and unique needs. To best maximize bond capacity, start by working with a surety professional. At Surety1, our only product and service are surety bonds. We have the knowledge, experience, and expertise to help increase performance and payment bonds.