When you think of Surety Bonds, what “F” word comes to mind?
Is it Financing, Funds Control or Factoring?
After reading this article, it might be!
Let’s sort these out: Financing is premium financing which is typically not available on most surety bonds b/c of their non-cancelable nature. Funds Control is a procedure the surety may require. A 3rd party paymaster handles all the contract funds, pays all the bills to reduce the possibility of a Payment Bond claim. Factoring is used to speed the contractors receipt of monthly payments. The factor is an intermediary that fronts each payment to the contractor immediately, then waits to be reimbursed when the money is released in due course.
Out of these three, Funds Control is the one you may run into. Sureties don’t like Factoring b/c it can result in the loss of dollars needed to complete the project.
Premium Financing is typically not available. However, Funds Control will guarantee the surety’s prompt receipt of the premium, if such an assurance is needed.
Steve Golia is a veteran surety producer, underwriter, author and instructor.
Over the course of the last 40+ years he has held a range of industry positions of responsibility including that of underwriter, bond manager, branch manager, and company officer for Aetna C&S, CNA, Mountbatten Surety, Amwest and FIA Surety.
As a producer, in addition to owning a bonding agency, he has worked for Johnson & Higgins, Haas & Haas, and was a nationally recognized “President’s Club” top producer at Bollinger.
Steve’s original career was teaching, which may explain his love for sharing information about surety bonds – a subject that is mysterious and vexing to many professionals.
Prior to the arrival of the internet, he established a long history of bond instruction through hundreds of classes and seminars that have been delivered for the Federal Government, Universities, Small Business Development Centers, SCORE, and several other public and private bodies.
Steve is a participating author for the Associate in Fidelity and Surety Bonding (AFSB) designation.
I never met a contractor who didn’t want MORE surety bonding capacity. Here are TEN ways to Boost that bonding line:
Leave profits in the company. To the extent that bonuses, distributions and salaries are limited, this directly helps bonding (and banking) by maximizing net worth.
Control 3rd party debt, such as bank debt. Limiting such borrowing improves the Debt to Equity ratio, which is a key benchmark for bonding. It also improves the company’s credit rating.
Stockholders / owners should avoid borrowing from the company. This directly reduces the net worth analysis and hurts the Debt to Equity ratio – both are bad for bonding. If such borrowing has occurred, start the process of payback ASAP.
Stockholders / owners can add funds to the company as permanent capital (not a temporary loan).
Funds already loaned to the company by Stockholders / owners can be subordinated to the surety. It then may be treated as net worth rather than 3rd party debt. The loan can also be converted to permanent capital.
Restructure 3rd party debt to longer term. Restructuring short term debt to long term directly increases the working capital calculation – an important benchmark for bonding.
Update equipment appraisal. The monetary value of heavily depreciated equipment can be recaptured and added to the net worth calculation.
Consider leasing buildings and equipment to preserve cash. Q. “Where did all the money go?” A. Oh, we bought a boat!” This DOES NOT help bonding. Company owners can personally buy such fixed assets and lease them to the company. Also, sell unused equipment and hold the cash.
Improve accounting procedures and methods. Better job cost records? Get a mid-year statement? Get a CPA? Get a CPA Review statement? Etc.!
Get a bank line. Even if you don’t need one, available bank credit directly helps the bonding capacity.
Bonus Tip: Pick the right bonding agent and bonding company.
The right agent knows construction and has other contractor clients.
The right bonding company is a problem solver, a highly experienced and confident underwriter – Like FIA Surety!
Specialists in Contract Surety, Site and Subdivision Bonds.
FIA Surety / First Indemnity of America Insurance Company 2740 Rt. 10 West, Suite 205 Morris Plains, NJ 07950 Office: 973-541-3417
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