You love being a developer, but it’s a tough industry. Here is a way to instantly improve your cash flow, and you could save time and money in the process!
Many developers are missing the boat when it comes to securing their projects with the local township. They tie up their cash for indeterminate periods and may expose themselves to financial loss – unnecessarily.
The local township requires a form of security to guarantee that the “public improvements / site work” will be built. You can satisfy this requirement with cash, an irrevocable letter of credit (ILOC) issued by a bank, or a surety bond. Cash and the ILOC amount to the same thing because lenders typically require full security to issue the ILOC (you post / encumber an equal amount of cash). Either way, your cash is tied up.
The “boat missing”
A surety bond, called a subdivision or site bond, is the better alternative. Many developers are not aware of this. Why is it better?
Frees up your cash – you could put cash with the township or bank (to back the ILOC), but then it is tied up for the duration. And how long is that?
The township is in no hurry to release the security. It protects the township and the taxpayers. If a problem develops, they don’t have to fix it, you do. You may expect your cash to be tied up for less than a year, but it could turn out to be two or three with all the red tape and inspections. If you used a subdivision bond, you simply renew it. When the bond amount is reduced based on your progress, the cost of the bond renewal goes down too.
Claims / problems – With cash or an ILOC, the township simply taps your cash while you sit by and watch. The surety bond can protect you. All claims must be processed though the claims department of the bonding company. There is a discovery process; we don’t simply write a check like the bank does under the ILOC. The bank is legally required to issue a check within three days! You have no leverage or control.
With subdivision bonds your cash remains available for other purposes such as acquiring and starting new projects. You gain control over your money and help protect it from claim by the township.
Think subdivision bonds are hard to get? They aren’t if you go to the right folks. We are a bonding company (carrier) that has specialized in this area since 1979! We also provide Down Payment Bonds!
You can call FIA Surety right now for more details: 856-304-7348 (Yes, we mean right now.)
First Indemnity of America Insurance Company, Morris Plains, NJ
Working Capital: It is a key element for contractors when they apply for Bid and Performance Bonds. Too low, and the bond or entire account may be rejected by the bonding company. Primarily, this number is calculated once a year on the fiscal year-end financial statement. If the Working Capital (WC) comes out low, you’re STUCK with it all year… or are you? Are there ways to “poof!” magically find more working capital on an existing financial statement? Why yes!
Here are three ways contractors and their insurance / bonding agents may overcome a WC deficiency:
Stockholder loan: The owner can Subordinate an existing loan to the surety. This means the owner / creditor will not demand that the company / debtor repay funds the company has borrowed. The Subordination removes the stockholder loan from current liabilities, thereby increasing WC.
Underbillings: Accrual Method financial statements do not include the current asset called Costs and Estimated Earnings in Excess of Billings, or for short: Underbillings. If a net Underbilling Asset is calculated, it will directly increase the WC analysis.
Bank line of credit: Many analysts will add available bank credit to the WC analysis.
Note: All three of these ideas can be applied to the recent fiscal year-end statement. You don’t have to wait for a new statement to use them!
How to immediately increase the Net Worth (NW) analysis: Fixed assets, such as heavy equipment, are depreciated each year resulting in their declining value on the Balance Sheet. The carrying value of the asset may eventually be less than the actual “street value” of the machine. This lost net worth can be re-captured by finding the current appraisal value. For big and old companies, this can give a major boost to the NW calculation – and therefore the bonding.
We hope you find these four tips helpful. They can literally improve the analysis of an existing financial statement.
Do ALL bonding companies want you to know these secrets? Hmmmm… We do! FIA is a bonding company (carrier) that has served contractors and their agents since 1979. We are flexible and creative surety bond experts. Call us for Bid and Performance Bonds. Call us for Site and Subdivision Bonds – our specialty!
Steve Golia, Marketing Mgr. 856-304-7348
FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ