Bonding Capacity 101: Simple Steps to Increase Bond Capacity

The construction market is expanding and improving every day. Contractors need to increase their bonding capacity to bid on larger projects. Higher bonding capacity helps prove that you are an established business that can complete projects. Bonding capacity helps contractors, like yourself, work through backlog by expanding business opportunities. 

Companies provide bonds so contractors can take on larger projects. This allows you to pay your suppliers and subcontractors easily, and it gives you the freedom to work on any project that you like. Keep in mind that you must have the adequate bonding capacity to work on bonded contracts. 

What Is Bonding?

Investors make bonds to borrowers as fixed income to represent a loan made to the borrower. The owners of the bonds are creditors or debt holders. Bonds are used by companies, states, sovereign governments, and municipalities. The details of the loan and the payments are listed in the bond. It also includes the fixed interest and the due date when the principal loan should end. 

If you are a contractor or any service-based business, you need to look for additional ways to protect your customer. Bonds offer an extra layer of security to your customer that simultaneously helps you with insurance and licensing. 

If anything goes wrong, bonds allow customers to file a claim with the surety company so they will cover the cost. This extra protection shields your customers from poor, unethical, and harmful business practices. There are two types of bonds:

  • Fidelity Bonds: Bonds that protect the customer and the business from theft, fraud, errant behavior, damages, or misconduct coming from the company employees. 

  • Surety Bonds: Also known as performance bonds, these bonds provide the consumer with a guarantee that the necessary services will be provided according to the agreement. This particular agreement involves a principal, the obligee, and the insurance company issuing the bond. 

What is Bonding Capacity?

Bonding capacity is the maximum number of bonds that a contractor can issue on any contract. The bonds are allocated according to the project, and they need to be ironclad. When hiring a contractor, the client should always address two things: the bonding capacity and the aggregate limit. The aggregate limit is the number of bonds the contractor can obtain for one project. It goes for both bonded and unbonded contracts. 

Bonding capacity provides you with the assurance that the contractor and their company are well prepared for the project you are about to start. 

When deciding the appropriate bonding capacity to give a contractor, a surety bond company will always review the following:

  • Project references

  • Financial strength

  • Banking history

  • Available credit

  • Credit score

  • Project preferences

  • Financial stability of competitors

  • Current work

Since the bonding company emphasizes these factors, they should also be important to the client. These factors essentially determine the company’s ability to complete the project. You can detect the company’s downfalls if you carefully examine these factors.

Bonding capacity prevents contractors from selling themselves short and keeps them from getting overwhelmed with projects. Both parties benefit from bonding capacity. It reflects the company’s ability to complete the task at hand, so you should always ask about it before contracting a company

How To Increase Bonding Capacity

One key question any customer will ask a contractor is how do I increase bonding capacity? Each contractor is different. Despite the differences, here are nine steps you can take to increase bonding capacity:

Use Personal Assets 

Many contractors have a high net worth and/or major equity assets that prevent their money from just sitting in the company. Some sureties can accept these personal assets as collateral on a job to provide a larger bond program. You would not have to put all of your assets into the company. 

You can also use cash or a home equity line of credit (HELOC) to put money in the business. This can be either a shareholder loan or paid-in capital. If you do not have the cash, you can ask a family member or friend to loan money to the company. Personal cash will boost your equity from the surety’s point of view. 

Reinvest Profits

You can create a healthier and stronger company (and balance sheet) by reinvesting some of your profits into your business. This may seem obvious to some, but to others, it is not. Business owners frequently face the temptation to use company money for other things. Profits can be used to purchase assets for the company, and they are often the biggest investment for your business. 

Each quarter, you should provide financial updates as the market increases. Your surety company can use this information to increase your bonding capacity, and you can also use this time to share any additional earnings from the quarter. 

Avoid Purchasing Fixed Assets

You may need to consider limiting your purchases by renting or long-term leasing, even if you can afford to buy outright. It is unarguably more convenient to have your equipment or trucks, but purchasing them may put a strain on your cash flow. When both your company and the market are growing, it is better to reinvest profits instead of buying equipment. With each purchase you make, you ultimately lower your working capital, dollar by dollar. 

Pursue Familiar Jobs

You may come across jobs that seem interesting or are outside your normal scope of work, but it is best to stick with familiar jobs. Working on jobs that fall under your area of expertise prevents you from taking jobs in unfamiliar territory. These projects can help you increase your bonding capacity to the point you are comfortable with by proving that you can complete fast, high-quality work.  

Use an SBA Program

The Small Business Administration (SBA) is an agency that lends money to owners by partnering with lenders, micro-lending organizations, and community development organizations. Many contractors believe that the SBA bond program primarily focuses on small companies and start-ups, but they have upwards of $36 million in revenue. Depending on the type of work, the program can bond individual contracts for up to $6.5 million. This program helps contractors increase bonding capacity by offering double the bonding capacity that most sureties allow. 

Bond Subcontractors

In today’s market, you can find bond subcontractors who will protect against unpaid wages, default, and penalties. You will even benefit if there is a subcontractor default. Bond subcontractors can help you take on bigger projects that will ultimately help your overall business growth.

Financial Representation

Quality financial representation makes it easier for you to manage cash flow and track profitability. These professionals charge by the hour, but the upfront cost pays off in the long run. Professionals keep a close eye on your finances. If your investments are not performing well, a professional will identify the problem and give you adequate time to change your business strategy. 

If you have financial representation, you are guaranteed a CPA-reviewed statement. Most surety companies require a statement with $500,000 or above. If you are under this threshold, the fastest and easiest way to increase your bond capacity is by seeking financial representation. They can also teach you about bonding cash flow to make the project-bidding process easier to understand. 

Use A Professional Agent

When looking for an agent, ensure that you are working with surety professionals. Their expertise is your one-way ticket to increase bonding capacity. While some insurance agents work with bonds, they usually are not experts in the field. 

Once you find an agent, always ensure that they have your updated financial information. They will use this to increase your bonding capacity. Providing them with updated numbers also builds trust in the relationship, ultimately helping increase your bonding capacity. 

Cash Flow Statements

All cash receipts and statements for the year are available in the cash flow statement. This tool is vital to any investor because it allows them to evaluate the business’ ability to pay its debts and make other necessary payments. The statement divides the cash flow into three categories: operating cash flow, investing activities, and financing focuses. You can easily find out the bonding cash flow, as well as the cash flow tied to acquiring and disposing of long-term assets by utilizing the cash flow statement. You are sure to increase bonding capacity when you can prove to investors and other financial institutions that you can acquire assets, invest, and pay off your debts.

Let us help with your bonding capabilities

Increasing your bonding capacity is a lot simpler than it seems. Financial strength is key, but there are many ways to increase your working capital and boost your balance sheet. The best place to start is by communicating with your agent to discuss the various methods available to you. Choose the option that ticks off all the boxes so that you get the correct surety for your business. Setting a plan and sticking to it is also a key element to work towards your goals. Act fast to strengthen your company’s finances, increase your bonding capacity, and get the projects of your dreams. 

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