Contractors understand the need to look good in the eyes of their bonding providers. But with the ups and downs in today’s economy, it can be difficult to demonstrate that you deserve a solid “thumbs up.” So how can you impress your surety that your bonding capacity is all that it should be? Read on.
What a surety looks for
One of the first things surety companies want to know is that you’re able to ride out economic storms. Anything you can do to remain profitable — from reducing your own indebtedness to improving your collections — will be particularly valuable in periods of economic uncertainty.
Your working capital and tangible net worth will likely sit near the top of any surety’s list of critical attributes, as will receivables and debt. Obviously, you want to increase working capital and tangible net worth, while decreasing past-due receivables and debt. In addition, sureties focus on backlog information for future billings and revenues.
A little debt will go a long way in influencing your surety’s view of you. You need to show a healthy relationship between liquidity and debt, as sureties aren’t comfortable with a contractor who’s so heavily leveraged that virtually all revenue is going to pay off debt. To improve your standing, consider debt reduction strategies such as an equipment sale or leaseback arrangement.
Consistency and liquidity
Of course, sureties look for consistency as well as solvency. If you’ve had significant swings in monthly performance, try to eliminate them and be prepared to explain them. Your surety is likely to look at how you fund delays and retainage, as well as how you handle change orders. Sureties also look at profit fade on a job — particularly any fade exceeding 10% of projected gains.
In addition, though a surety wants to know you can finish a job, it also wants to know you have assets it can seize if you don’t. Excessive prepaid expenses, shareholder receivables and inventory all will count against you. Cash, current receivables and a reasonable amount of inventory will work in your favor. Sureties are less enamored of property and equipment that aren’t liquid — particularly if you have too much capital tied up in them.
Work in progress and more
Another important consideration for bonding capacity is work in progress. Sureties aren’t looking for expert builders; they’re looking for expert business people. They want some assurance that you use accurate estimates and consistent approaches, and that you can still complete what you’re doing if you add more work to the schedule.
If you have multiple projects open, you may want to close a few to improve your bonding capacity. Also, review your charges. If you billed one owner $150 per hour for a backhoe and another owner $200 for the same piece of equipment, be prepared to explain why. If you’re undercharging on some jobs, the surety may reason that you’re undervaluing your work in progress.
Sureties look beyond the numbers, too. They want to see a history of successful projects and work experience, an organizational leadership depth chart that demonstrates your ability to stay in business if a key leader leaves unexpectedly, a history of banking relationships, and a business plan that indicates you know where you’re going and what you’re doing.
Prove your worth
The one word that your surety wants to hear is “stability.” So make sure you do everything you can to prove your worth. And, of course, get your financial advisor involved. He or she can offer tips on how you can keep your surety happy.
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