This post is part of a series sponsored by Old Republic Surety.
If you have construction clients who are in growth mode and want to take on bigger projects, here’s help you can share for increasing their surety capacity — particularly if they need to transition from a credit-based quick bond program to a standard surety program.
Does your company have growth goals? Does your company need additional surety capacity to reach those goals? Maybe you’d like to bid on larger projects, or maybe a longtime customer wants to hire you for a much larger project.
While a standard surety program is not “one size fits all” for every contractor, there are crucial steps you can take to help you graduate from a credit-based quick bond program to a standard, larger surety program:
- Form a partnership with trusted financial advisors.This includes a construction-oriented CPA, a bank that understands construction lending, a professional surety agent and, of course, your surety underwriter.
- Increase the quality of your financial statements.Often, taking your business to the next level requires hiring a construction-oriented CPA to prepare a year-end review and high-quality financial statement. A construction CPA will assist with stronger internal controls as well as crafting the necessary financial presentation required for maximizing bonding capacity.
- Strengthen internal controls and your ability to track cost-to-complete backlog.Standard bond programs require more sophisticated cost systems and financial information. While a construction CPA can also assist, a qualified in-house controller will help develop and strengthen internal processes and controls. A strong controller will also help prepare internal financial statements that are in the desired format and that are accurate and trend back to your fiscal-year-end CPA review.
- Increase frequency of financial statements. Outside of the fiscal-year-end CPA review and annual personal financial statement, you will also need to provide internally prepared financial statement updates on a quarterly basis — including balance sheet, income statement, aging of receivables and work-in-progress (WIP) statements.
- Obtain (or increase) a bank line of credit.Construction is an unpredictable business that carries substantial risk of unanticipated payment delays. Overall cash flow management paired with access to capital is key for daily operations and survival of contractors. The advantages of a bank line include providing capital when a receivable is delayed and giving you the ability to take advantage of discounts from material suppliers.
- Retain profits in the company.Sureties like to see a company organically growing its balance sheet. They analyze trends and look for steady income being retained over several years. It’s important to balance your tax planning with leaving capital in the business, which will increase your working capital and net-worth positions — ultimately strengthening your balance sheet. As your company’s retained earnings and net worth increase, you can expect your bonding capacity to grow along with it. While retained earnings are important, it is often said that “cash is king” — as sureties are also looking for liquidity and unleveraged capital when they do financial analyses.
Keeping surety qualifications top of mind as part of your scaling strategy will help set the stage for ongoing eligibility for larger bonds.
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