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Surety Bond Receivables and Lending

August 31, 2022

Contractors needing surety bonds are often surprised to learn that a bank or lender will not lend against their bonded accounts receivables. Learn more about what this means and why they typically cannot borrow against these receivables. 


What Are Account Receivables? 


Account Receivables are monies owed to a company on credit by other parties for services already performed or materials rendered. Accounts Receivable are often abbreviated A/R. Account Receivables are treated as a Current Asset on a company’s balance sheet as they are expected to be collected in a short period of time. 


Bonded Account Receivables


Bonded Account Receivables are monies owed to a company on a project that is protected by a Contract Surety Bond such as a Performance Bond, Payment Bond, or Maintenance Bond. Typically, Bonded Account Receivables apply to construction contracts. However, they could also apply to a variety of Service Contracts including technology, manufacturing, janitorial, and many more. 


Unbonded Account Receivables


Unbonded Account Receivables are monies owed to a company on a project that does not have a Contract Surety Bond. For many businesses, all Account Receivables are unbonded. When referencing Unbonded Receivables, it is typically referring to the unbonded portion of Account Receivables for companies that do use Contract Surety Bonds such as contractors. 


Using Account Receivables in Lending


Both lenders such as banks and surety bond companies rely on Account Receivables. Since the company has earned them, they should be able to be converted into cash in the near future. Lenders particularly underwrite Account Receivables when extending revolving credit to a business. However, contractors and sometimes lenders are surprised when the lender cannot take the contractor’s Bonded Receivables into consideration when extending credit. This is because case law gives the surety bond company priority on Account Receivables for bonded projects. 


The Purpose of Performance Bonds and Payment Bonds


Performance Bonds guarantee that a project will be completed according to a contract and contract price. Payment Bonds guarantee that subcontractors and material suppliers are paid for work and material supplied to a project. The bonds are required on Federal Projects by The Miller Act and most other public work as well. 


Performance and Payment Bonds are said to protect the interest of the public. For example, they keep taxpayers from paying additional money to have a project completed. They also protect materials suppliers and subcontractors on public work when a Mechanic’s Lien cannot be filed. When a bonded Principal (contractor) cannot perform, the surety bond company must step in their shoes and finance project completion, and/or pay the subcontractors and suppliers. 


In consideration for this protection, they are contractually allowed to Subrogation or “step into the Principal’s shoes” and use contract receivables for these payments. Unlike lenders, surety bonds are written on the assumption of no losses. Without being able to use contract receivables, surety bond companies would have no protection and would be very difficult to obtain without collateral. Therefore, case law gives surety bond companies priority over lenders if a problem occurs on the bonded project.


Proper Lien Filings Do Not Affect a Surety’s Priority


Surety Bond Companies rarely make filings under the Uniform Commercial Code (UCC) unless they receive notice of a claim. They also do not have to in order to take priority status over a lender on a bonded project. This is the case even when a lender has made a priority UCC lien filing.


A recent court ruling affirmed this priority. In the case of Hanover vs. Kapp Development and General Contracting, a lender, had a properly filed first security interest with Kappa. However, the court ruled that Hanover’s (the surety bond company) right of Subrogation was superior to the lender’s position, even though the lender had properly filed their security interest.


Each Project is Treated Separately


Although a surety bond company has priority of Account Receivables on bonded projects, their right of Subrogation does not extend to unbonded projects. Courts have ruled that each project must be treated separately. 


Therefore, lenders with properly filed security interests will take priority over the surety bond company’s claim on non bonded projects. This is true even when the surety bond company’s Subrogation does not make them whole on a bonded project. In other words, the surety bond company will get the Receivables on the bonded project, but the lender will likely get the Receivables on the unbonded projects, even if there is not enough money to satisfy either party.


Alternatives to Lending Against Receivables 


Because of case law, many lenders are unwilling to lend against bonded Account Receivables. Fortunately, there are alternatives for contractors that doostlh bonded work.




Contractor with Equipment such as civil contractors can usually obtain credit by using their equipment equity. However, this usually only works if the equipment is financed with the same lender or the equipment is paid off. Most lenders do not want to be in a second security position behind another creditor.


Buildings and Land


Many contractors own real estate such as buildings and land that can be used to borrow against. Some lenders will take a second security position, but others will not.


Smaller Banks and Credit Unions


Often, community banks and credit unions will lend against bonded Account Receivables, even though a surety bond company has priority of claims. These lenders are usually aware of the risks, but are willing to extend credit to contractors as part of their overall services with the company. 


Secured Lending


Most lenders will provide a line of credit to a contractor in exchange for holding collateral with the lender such as a Certificate of Deposit, Securities, or other investments. Lenders will not usually take a collateral position on retirement assets such as 401ks, IRAs, pension plans, etc. Of course, the contractor usually cannot access this collateral as long as the loan is outstanding. 


Understanding Case Law of Account Receivables can help contractors and lenders make better decisions, and avoid surprises. Fortunately, there are alternatives for securing financing that can benefit all parties. 


Vice President at Axcess Surety
Vice President of Axcess Surety. Surety Bond and financial expert dedicated to helping contractors, businesses and individuals understand and obtain surety bond credit.
Josh Carson, AFSB

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