Equipment is vital for heavy contractors to obtain work and run their business. Unfortunately, equipment purchases can cause difficulties for contractors needing Contract Surety Bonds. Learn more about how surety bond companies view construction equipment and what heavy contractors can do to maximize bond capacity.
There are many surety bond companies writing contract bonds. However, most of these companies put a heavy emphasis on a contractor’s working capital. Working Capital is a company’s current assets minus its current liabilities. Working Capital is simply a measure of a company’s ability to pay its bills over the next 12 months.
Working Capital underwriting can create challenges for heavy equipment contractors. Often, their Capital is tied up in their equipment. Equipment is a long-term asset that does not increase working capital. Even worse for heavy contractors, although equipment is mostly purchased through long term debt, a portion of that debt is a current liability and negatively affects working Capital. Therefore, contractors with heavy equipment fleets may also be light on working capital.
Heavy equipment contractors may significantly benefit by switching to a bond company that values net worth over working capital. Net worth (or equity) is simply a company’s Total Assets minus its Total Liabilities.
Net worth underwriting helps heavy contractors because equipment equity can add to their bond capacity. Current debt payments toward equipment do not have such a negative impact. As long as the equipment’s book value continues to be greater than the debt against it, the equipment will produce positive Net worth and help the contractor with bonding.
A surety bond company looking at net worth may also credit the contractor with “off balance sheet” equity. Contractors are required to depreciate their equipment under Generally Accepted Accounting Principles. However, equipment often has market value, even after it is fully depreciated. A contractor with a lot of used equipment may have a lot of net worth that does not show up on the company’s balance sheet. Normally, a recent appraisal is sufficient to help a net worth bond company count these assets.
The downside to working with a net worth bond company is that they tend to frown upon debt. However, equipment debt is often necessary to carry out operations. As long as a contractor can balance the debt with the net worth in their company, this is not usually a problem. Most of net worth bond companies want to see a contractor limit their debt to no more than 4 times their company’s net worth. Of course, less is better.
A final consideration when looking at a net worth bond company is how much bond capacity is actually needed. Although their capacity has grown in recent years, most companies writing very large surety programs are working capital based. Still, most net worth companies can now provide programs of up to $100 million in bond capacity. These limits can accommodate a large number of the heavy contractors out there.
Heavy contractors need equipment to obtain and complete new work. This is often a frustration when they need surety bonds in their business. Heavy contractors can often reduce a lot of their challenges by working with a company that focuses on Net Worth instead of Working Capital.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
