Many small to midsize construction businesses struggle with bonding capacity. You’ve likely tried to stick to long-standing, surety-pleasing practices such as presenting accurate estimates and staying on friendly terms with your bonding agent. However, you may be overlooking, or at least underusing, a “secret weapon” for bonding capacity: your financial statements.

What do the numbers say?

Start by reviewing the sections of your financial statements that outline your company’s debt structure. Primarily, this means studying your balance sheet, though your statement of cash flows and footnotes may also be relevant.

For example, imagine you’ve used a $500,000 line of credit to buy $200,000 in heavy equipment, intending to pay it off over three to four years rather than securing a long-term equipment loan. Although functional, this strategy can reduce working capital and bond capacity because the entire outstanding balance is recorded as current liabilities. (Similarly, many contractors use cash reserves to buy equipment, giving up a current asset for a long-term asset, which also hurts working capital.)

Refinancing the equipment with a four-year term loan could improve your current ratio by moving all but the next 12 months of payments into long-term liabilities. This shift often strengthens the balance sheet in a surety’s eyes, helping boost bonding capacity without changing your operations.

Next, examine notes receivable. Say you hold a $100,000 note from an entity in which you own a 50% interest. If that note has gone unpaid for 12 months, your surety may exclude it from working capital, reasoning that it’s unlikely to be converted to cash soon. To improve your bonding position, you might work with the related entity to establish a documented repayment plan and begin converting that receivable into cash.

And how about inventory?

Some contractors buy large quantities of materials just before year end to take advantage of supplier discounts. This may be a smart purchasing strategy, but it can cause problems if your surety doesn’t understand what those materials are or how soon they’ll be used. Without proper disclosure, your bonding agent may assume the inventory is obsolete or excess and apply a steep discount.

A straightforward fix is to break out the main inventory components in your financial statement footnotes and disclose their intended uses on upcoming projects. This additional transparency can help ensure the inventory receives full surety credit, preventing unnecessary reductions in bonding capacity.

Who can help?

Proactively managing how debt, receivables and inventory are presented to your surety can positively impact bonding capacity. Ask your accounting professional for help ensuring your financial statements reflect your construction business’s true strengths.

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