Secrets of Bonding #4: Working Capital


Surety bond underwriters base their decisions on a wide range of factors including the contractor’s prior experience, quality of staff, credit history and financial condition.  Many of the factors are subjective but some are just cold hard facts. Working Capital (WC) is among the more straight forward elements, and is easily identified.  It’s worth knowing about because it is an unavoidable piece of the underwriting puzzle, and to many sureties it is one of the most important. If there is a magic wand you could wave over an account to get it accepted, this is it!

What is Working Capital and how do you find this element?

Working Capital is a prediction of the company’s future, near term, cash flow.  Based on one day in time, it predicts the amount of cash that will flow through the business to pay bills, finance new ventures and solve problems that arise.  These are all important factors for surety bond underwriters.

WC is located on the company’s most recent year-end financial statement (FS).  The most common date for this is 12/31 of the preceding calendar year. Turn to the Balance Sheet, then the Assets column, and then the subtotal called “Current Assets.”  Now find the corresponding figure in the Liabilities called “Current Liabilities.”  The difference between these numbers is called “Working Capital as Given” meaning it is taken right off the FS without analysis or adjustment. Underwriters will hope to find that the WC is about 20% of the single contract size the client wants to bond.


Current Assets: $600,000 – Current Liabilities: $400,000 = Working Capital of $200,000

$200,000 is 20% of $1,000,000 which could be the maximum single job size (assuming other factors are also in line.)

If the WC is too low, the account may be found financially deficient for the amount of capacity requested.

  • That’s the cut and dried part.  Now comes the art.  What can be done if the WC is insufficient? Some ideas:
  • First, it is important to review a draft of the year-end FS so an early version of the numbers can be evaluated. This is the time to make adjustments before the FS is carved in stone.
  • On the asset side, debt collection from stockholders / owners (money owed TO the company) directly helps WC.
  • Refinance fixed assets.
  • Unused equipment and other fixed assets such as real estate can be sold and the proceeds held as cash.
  • WC can be increased by shifting bank debt from current to long term.  Companies with all their debt as current should consider refinancing for a longer payback period.
  • Money can be loaned temporarily or permanently to the company by owners. If there is room to add bank debt, it could be beneficial if the payback is long term.
  • The draft FS is the key to this process.  Get the underwriter’s opinion regarding the capacity desired.  If the FS doesn’t support the figure, make adjustments now so that surety capacity will not be inadequate for the next 12 months.

Working Capital can be a magic wand if you know how to wield it!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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