Hello and welcome. My name is Ben Williams with MG Surety Bonds. And this is our show, Work In Progress dedicated to surety bonding and all things construction. Today we’re going to give contractors four easy tips for increasing their bond capacity. Let’s get started. One thing we get asked by contractors of all sizes is, how do we increase our bond capacity?
Here are four quick tips for increasing bond capacity. Number one, upgrade your internal accounting system. Your internal numbers are important for bond underwriters to give you bond capacity. These numbers should both be accurate and timely. Also, they should be on a percentage of completion basis, which is the most accurate way to account for construction contracts. That means they should include under billings and over billings, accurate depreciation numbers, and job schedules such as a work in progress and completed contract schedule.
Tip #1 – Software
Now, there are a lot of great software systems out there that can accomplish this. But a couple of quick tips. Number one, if you can go to your local box store and buy that software, it’s probably the wrong one for construction.
Number two, if it’s geared towards any other business other than the construction industry, again, it’s probably the wrong software system. Give us a call anytime. We’d be happy to give you a couple of recommendations.
Tip #2 – CPA Choice
Number two on our list is to upgrade your CPA. Now we’ve all got a friend, neighbor or relative who probably has the initials CPA after their name, however, that doesn’t make them a construction expert. Construction accounting really is a beast of its own. Your bond company can identify good construction accountants quickly by looking at your statement. And if those statements are not done by somebody with the right experience, it will hurt your ability to bond jobs in the future.
Another reason you want to hire a good construction CPA is often non-construction CPAs try to justify their fee by saving you money on taxes. Now in theory, this sounds good, but usually those actions are at the detriment of your bonding. Examples include spending money on unnecessary equipment, accelerating depreciation, or even investing in other non-construction companies in order to save you on taxes.
A better strategy if you’re really set on saving taxes would be to get with the construction CPA and get two sets of books. Now this is perfectly legal. One set of books will then be given to your lender and your bond company, and the other set of books is for tax purposes. The difference in these two books will show up on your statement as a deferred tax asset or deferred tax liability.
Tip #3 – Leave Money in the Company
Now, the third item on our list may sound easy but it’s probably the most difficult, but if you want to do monitored work, you’re going to need to leave money in the construction company. Now, there are some bond companies that will look at the personal assets of the owners, but the vast majority of bond companies want the financial strength to be in the construction company.
Tip #4 – Distribution Strategy
That brings us to the fourth and final item on our list. Have a distribution strategy. Now, for the purposes of this conversation, a distribution strategy is your plan for the company’s profits. Bond underwriters don’t like surprises. They especially don’t like it when all the money is distributed out of the company. Having a plan in place, communicating that plan, and living up to it will give them a lot of confidence in your management and make getting bonds approved much easier.
Now, if you don’t have a plan today, I might suggest the strategy of thirds. Now, what that means for an S corporation, you take a third of the profits out to pay taxes, you take a third out to pay the shareholders, and the other third stays in the company to build up the balance sheet. Of course, this strategy can be altered depending on how much bond capacity you need and at what stage of business you’re in. For example, a more seasoned company with a strong balance sheet may be able to distribute more. A new company that’s trying to build up may need to retain more.
We hope you’ve enjoyed this show with tips for increasing bond capacity. If so, hit that subscribe button so you can make sure to get all future episodes. Also, we want this to be interactive for you, so if there are shows you’d like to see us do in the future, leave them in the comments section below and we’ll do our best to accommodate. Of course, you can contact us anytime. I’m Ben Williams. This is Work In Progress and thanks for joining us. We’ll see you next time.