As a contractor, securing bonds for large projects can be a significant challenge, especially for younger companies. Recently, we encountered a situation where a client needed a $1.5 million bond but was declined by standard surety underwriters due to their financial position. Ultimately, we were able to secure the Bid Bond with a path to their Performance/Payment Bond should they be awarded the job. This experience highlights the complexities of the bonding process and the importance of understanding how to increase your bonding capacity.
Understanding the Bonding Process
Bonding is a personal process, similar to walking into a bank and asking for a large loan without collateral. Underwriters heavily scrutinize financials and need a solid file to document their decision, especially for large bonds. It's not always about being in a bad financial position; sometimes, the request is simply too large for the current work and assets of the company.
Check out our Surety Bond page here or watch the video below to learn the basics of surety bonds
A Surety Bond is a Three Party Agreement
This three party agreement is a guarantee by the Surety that the Principalwill fulfill their required obligations to the Obligee.
A surety bond holds someone financially accountable and by doing so, they are encouraged to act in an ethical and responsible manner.
Strategies to Increase Your Bonding Capacity
Find a Knowledgeable Agent: Work with an insurance agent who understands the intricacies of surety bonds and can guide you through the process. It is also important that they have access to multiple surety underwriters and/or brokers.
Retain Profits: Keep profits within the company to strengthen your financial position.
Limit Debt: Minimize your company's debt to improve your financial ratios.
Avoid Borrowing from the Company: Personal borrowing from the company can weaken your financial statements.
Add Funds as Permanent Capital: Injecting permanent capital can bolster your company's financial strength.
Subordinate Loaned Funds to Surety: If you've loaned money to the company, consider subordinating these funds to the surety.
Understand and Manage Your Work-in-Progress: Keep a close eye on your work-in-progress schedule. Effective project management and timely completion of projects can boost your bonding capacity.
Update Equipment Appraisals: Ensuring your equipment valuations are current can positively impact your balance sheet.
Consider Leasing: Leasing equipment instead of buying can preserve capital and improve your financial ratios.
Work with a CPA Who Knows Surety: A CPA familiar with surety requirements can help present your financials in the best light.
Provide Reviewed Financial Statements: While it may cost more, having a CPA provide reviewed statements with accounting notes can strengthen your application.
Secure a Bank Line: Having a solid banking relationship and line of credit can demonstrate financial stability. This may also be a requirement
Maintain a Strong Safety Record: A good safety record can positively influence your bonding capacity. Implement robust safety programs and keep detailed records of your safety performance.
Diversify Your Project Portfolio: Demonstrating experience in various types of projects can increase underwriters' confidence in your ability to handle diverse work.
Develop Strong Relationships: Build and maintain good relationships with project owners, general contractors, and suppliers. Positive references can support your bonding applications.
Rework Third-Party Debt: Restructuring existing debt can improve your financial picture.
Improve Your Accounting Practices: Implement robust accounting systems and practices. Accurate and timely financial reporting can significantly improve your credibility with sureties.
Consider Joint Ventures: For larger projects, partnering with a more established contractor can help you secure bonds that might be out of reach individually.
Utilize Funds Control: For smaller contractors, agreeing to funds control can sometimes help secure bonds. This demonstrates your willingness to have oversight on project finances.
Alternative Solutions
When standard bonding options are unavailable, explore alternatives. For instance, some sureties offer credit-based programs with lower bonding limits. While these may not meet all your needs, they can be a stepping stone to building your bonding capacity.
Remember, building bonding capacity takes time and effort. Even established companies with solid financials can face challenges securing large bonds. By implementing these strategies and working closely with knowledgeable professionals, you can gradually increase your bonding capacity and take on larger projects.
Stay persistent, focus on strengthening your company's financial position, and don't hesitate to seek expert advice. With the right approach, you can navigate the complex world of contractor bonding and position your company for growth and success.
Conclusion
Navigating the world of contractor bonding can be challenging, especially for growing companies taking on larger projects. However, with the right strategies and a proactive approach, you can steadily increase your bonding capacity and open doors to new opportunities. Remember, building a strong bonding profile is a journey that requires patience, financial discipline, and strategic planning.
By focusing on financial health, maintaining open communication with surety providers, diversifying your project portfolio, and implementing sound business practices, you're not just improving your bonding capacity – you're building a stronger, more resilient contracting business.
Take Action Today
Don't let bonding limitations hold your business back. Here's what you can do right now to start improving your bonding capacity:
Assess Your Current Position: Take a hard look at your financials, project history, and current bonding limits. Identify areas for improvement.
Connect with Experts: Reach out to a knowledgeable insurance agent who specializes in contractor bonding. Their insights can be invaluable in charting your path forward.
Review Your Financial Practices: Schedule a meeting with your CPA or consider finding a construction-focused financial advisor. Discuss strategies to strengthen your financial statements and improve your bonding profile.
Start Small, Think Big: If you're currently facing bonding limitations, look for smaller projects that can help you build a strong track record. Every successfully completed project is a step towards higher bonding capacity.
Educate Your Team: Share this information with your management team. Building bonding capacity should be a company-wide effort.
Ready to take your contracting business to the next level? Contact us today for a personalized consultation on how to maximize your bonding capacity. Let's work together to turn your business goals into reality.
Don't let bonding constraints limit your growth – act now to secure your company's future in the competitive world of contracting.
More Industry News
Want to stay up to date on the latest community and insurance news? You can find more on important topics onour blog.
A third-generation insurance agency owner and agent since 2007, Tyler Bartosh is the consummate “insurance geek,” using his passion for business, knowledge of insurance, and advocacy for clients to help serve as the expert buyer of insurance. He helps businesses implement risk management strategies that save both time and money, so those resources can be put towards other initiatives in your company.
Away from his career in insurance, he enjoys spending time with his family & friends, volunteering throughout the community, golf, fishing, snowboarding, hiking and virtually anything outdoors and traveling to see live music. Tyler has a wife Emily (who is also an underwriter in the insurance industry), their dog Lucy and a baby girl, Sophie Constance.
About Top O' Michigan Insurance Solutions:
At Top O’ Michigan Insurance Solutions, we pride ourselves on using our skills to provide clients with competitive pricing, stability and understanding, and peace of mind. With seven locations throughout Michigan and 24/7 client access, our team is your 'expert buyer' of insurance for home, auto, farm, boat, motorcycle, business owners, workers compensation, bonds, life and health, employee benefits and more.
We will provide unparalleled and caring service to our clients through our knowledgeable staff and give back to our employees, agency, industry and our communities. Part of our mission is to give back to the Michigan communities we serve. This is something we take action on through We Care and you can learn more about our community outreach at TOMIA247.com/WeCare.
National Resources, Locally Sourced.
Disclaimer: This Blog/Web Site does not provide insurance or legal advice. This site is for educational purposes only as well as to provide you with general information and a general understanding of insurance, not to provide specific legal advice or specific contract advice. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute a client relationship.
The information on this Blog/Web Site is not intended to be a substitute for professional insurance or legal advice. Always seek the advice of a licensed agent in your state pertaining to insurance and legal issues.
Comments
There are currently no comments
New Comment