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5 Tips for Increasing Surety Bond Capacity at Year End

November 26, 2021

As the year comes to a close, here are 5 tips to help contractors increase their surety bond capacity in the coming year. Bond capacity is simply the Surety bond credit that a Surety company is willing to extend a contractor.

 

Have a Distribution Strategy

 

Contractors should have a distribution strategy in place and communicate that strategy to their bond company. This eliminates uncertainty that Surety bond companies may have about company profits. 

 

An effective distribution strategy should reflect where a company is in its life cycle. Many companies should plan on something such as a 1/3rds strategy. This strategy for example has a company take ⅓ of their profits to pay taxes, ⅓ to distribute the shareholders and ⅓ to remain in the company for growth.

 

The 1/3rds strategy is not for every contractor. Contractors who are starting out or just looking to grow may need to retain more money to grow their bonding capacity. That would mean less money can be distributed to shareholders.

 

Alternatively, a contractor that is very established may already have a balance sheet that supports their bonding and growth. They may want to distribute more to shareholders and retain less. 

 

Collect Accounts Receivables

 

Most contract Bond companies base bond capacity as a multiple of working capital. Working capital is a company's current assets minus its current liabilities. 

 

Accounts Receivable are often one of contractors largest current assets. However, Contract Bond companies do not count receivables that are older than 90 days. The thought is that old receivables are likely to never be collected.

 

Having old receivables reduces working capital and reduces bonding capacity. One step contractors can take to improve their bond capacity is to ensure old receivables are collected by year end when their financial statements will be produced.

 

Watch Asset Purchases

 

At year end, it can be tempting for contractors to purchase additional equipment, vehicles, and other assets to reduce their tax liability. Unfortunately, these things increase debt, reduce cash, and increase depreciation. These are all things that decrease bonding capacity. 

 

Additionally, purchases create debt obligations that make profitability harder in the future. Contractors doing bonded work often have to accept that most things they do to reduce tax liability will also reduce bond capacity.

 

Revolving Debt Timing

 

As discussed earlier, working capital is a primary driver for bond capacity with most contract surety bond companies. Revolving bank lines of credit show up on a company's balance sheet as a current liability. The more borrowed on the line of credit, the less working capital and the less bond capacity.

 

Contractors may not have the ability to reduce their bank debt at a given time but they can control timing of payments. Contractors needing more bond capacity should time these payments for year end. 

 

Even if they borrow the money back against the line of credit after year end, the bank debt will be reduced at year end when the CPA statement is completed. This should lead to an increase in working capital and bond capacity.

 

Upgrade the Scope of the Company's Financial Statements

 

One of the easiest things Contractors can do at year end is to upgrade their financial statements. Better quality statements give surety bond companies more comfort that the statements are accurate. Most contractors should have at least a CPA Reviewed financial statement. 

 

If the company already gets a Reviewed statement, consider making improvements to your internal statements. Contractors usually go broke because they lose track of cash and job profit fades. Upgrading financial statements will protect the company and lead to more bonding capacity.

 

Axcess Surety has bond experts who know best practices for getting bonds and increasing bond capacity. Contact us anytime for tips on how to improve your company's bonding. 

 

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