Obtaining Bonding in Difficult Economic Times
Contractors need bonding to work on many projects. Unfortunately, obtaining bonding is never a sure thing. Long-established contractors, as well as new and emerging contractors, are being asked by surety companies to meet more stringent requirements in order to get bonding. Before underwriting their projects, surety companies want contractors to provide detailed business plans, regularly updated financial statements prepared by CPA firms, and information on contract terms and conditions.
It’s critical that contractors take the time to carefully prepare and gather data well ahead of any meetings with underwriters. While contractors may be bidding on fewer large projects than in the past, they have to be forward looking and ready to capitalize on the increased demand that often appears following the end of a recession. Here are some factors you should focus on when preparing an application for surety bonding.
A Strong Balance Sheet
Underwriters generally require evidence that your business is in good financial health. They want certain assurances that it has the financial strength to undertake any project it is bidding on. One way they’ll assess the strength of your balance sheet is by looking at the adequacy of your working capital. That means they’ll examine the current ratio and the quick ratio. The current ratio is the amount of current assets divided by current liabilities. The quick ratio is the amount of cash, cash equivalents, and receivables divided by current liabilities — an indicator of your company’s short-term liquidity.
Sureties will also look at the age of your accounts receivable to see if they may present problems in the future. Your firm’s capitalization and debt will also be reviewed. Too little capital and excessive debt are warning signs to a surety that your balance sheet is unhealthy. Underbillings are another area that a surety will examine closely. High levels of underbillings can indicate that you are experiencing problems on one or more jobs.
Sureties will want to know if your business is capable of handling the types of jobs it plans to bid on. It will look at prior projects to see if your business has the experience to complete the requirements of the to-be-bid-on contract. In addition, you will have to provide evidence that you have the equipment and manpower to do the work.
Established Banking Relationships
Another important factor sureties will focus on is whether your business has an established banking relationship. If applicable, be certain to let sureties know that your business has a sufficient line of credit and an excellent credit history.
Updated Business Plan
A business plan helps your business define its goals, clarifies the steps you need to take to reach those goals, and provides markers along the way to help you measure your progress. Most sureties will want to review your business plan before they will consider underwriting a bond. That’s why it’s important that your business plan be reviewed yearly and updated when you hire key personnel.
Sureties are requiring more detailed information than in the past. Be prepared to be asked to supply information on:
- Your personal finances
- Any transactions between related parties
- The existence of a formalized continuity plan
- Employee turnover rates
- Any non-bonded work you plan to bid on
You can increase your chance of obtaining the bonding you need by putting effective financial reporting procedures in place. We can help in this and in numerous other areas. Please call us if you need assistance.
Check out www.sba.gov to learn more about the two U.S. Small Business Administration Surety Bond Guarantee Programs. You’ll find information on the small business eligibility requirements, the bond guarantee application process, and bond guarantee fees.