Are you looking for a way to increase your surety bond capacity? If so, you may find the answer you get doesn’t always offer the desired clarity. That’s because no two contractors are exactly the same and there are no two contractors that are dealing with the same exact circumstances.
If you combine that with the fact that there are countless surety companies with different risk limits, you wind up even more confused. While this is true, there is some good news. There are steps you can take to help increase your bond capacity, which are found here.
Remember – Cash is King
It’s understood that most people don’t have piles of cash lying around. While this is true, you can make smarter decisions when you are faced with distributions, investments, and purchases. Remember, contractor failures and bond claims come when a contractor runs out of cash.
Reinvest Your Profits
You should be reinvesting your profits into your business, which can help strengthen your balance sheet. It will also lead to a stronger and healthier company, which is something that’s appealing to surety companies when a new bond is needed.
Avoid Purchasing Trucks or Equipment
Instead, think about renting or a long-term lease option for equipment. While it is nice to have equipment that you own, it can put a strain on your financial situation. Often equipment increases leverage and the higher depreciation will make it more difficult to show a profit.
Upgrade Your Financial Presentation
If you invest in quality internal controls, this shows your ability to manage your cash flow, track your profitability, and manage jobs. The investment is going to pay off – not only with the bond company, but it’s going to make the life of your CPA easier too. This is a good thing as most CPAs charge by the hour. Many bond losses occur because the contractor does a poor job managing their cash and costs. Show them you have a great handle on this.
Invest in CPA Reviewed Statements
High quality CPA statement are one of the easiest improvements that contractors can do to get more bond capacity. Depending on what level you want to reach, a high-quality statement with over/under billings, depreciation and job schedules will give bond companies more assurances in your abilities. This may allow them to stretch your bond program.
Stay within Your Area of Expertise
You should pursue jobs you are familiar with when you are trying to increase your capacity. If you are an expert in fiber optic installation, you should not try to stretch your limit by taking on a job that’s outside of your expertise. You can stretch your overall bonding capacity by staying in your comfort zone by choosing a project close to home that focuses on a class of work you can handle in your sleep.
Seek an Increase in Your BLOC (Business Line of Credit)
If you have an unused business line of credit, it’s going to increase your overall bonding capacity. Also, this can help you through the ups and downs you may face with your cash flow, which gives you a safety net when things get tight financially.
Problems with subcontractors and supplier can quickly derail a project. A bond company will be more comfortable stretching when they know you are protecting yourself from these risks. Prequalification, sub bonds and subcontractor default insurance are just a few ways to mitigate this risk.
If you want to increase your surety bond capacity, consider using the strategies found here. Doing so is going to pay off and help you get the bonds you need for the jobs that you take on. Every situation is different though. MG employs bond experts and we specialize in helping contractor increase their surety bond capacity. Contact us for more creative ways to help build your capacity.