bonding company

Secrets of Bonding #118: Bonding Company = Girlfriend

Steve Golia2 Comments

I’ve been in the surety business for a long time.  As a student of the industry, I have observed the dynamics that occur between bonding companies and their clients.  My conclusion: Bonding Companies are like Girlfriends!

(My comments are written from a male point of view, but I’m sure you can flip this to be applicable if the reader is “non-male.”)

Think about relationships you’ve been in.  Don’t they always have a “love / hate” aspect? Jokes about relationships often capitalize on this reality:

Marriage is a three-ring circus. First the engagement ring, then the wedding ring, then the suffering.
– Milton Berle

My wife is a light eater … as soon as it’s light, she starts to eat. 
– Henny Youngman

“I am” is reportedly the shortest sentence in the English language. Could it be that “I do” is the longest sentence?
– George Carlin

And for the ladies:

What’s the difference between a boyfriend and a husband?
About 30 pounds.
– Cindy Garner

As very sophisticated types, we know how to deal with the technicalities of these relationships.  It isn’t always easy, but it’s worth it.   Bonding is pretty much the same!

Step One

How does a construction company gain the support of a surety?  It starts with a flirtation and then “getting to know you.”  The underwriter receives information about a bond that is needed. If there is a spark of interest, an application and financial statements are submitted. 

The construction company wants to look attractive:

  • Here is what we’ve accomplished!
  • This is how much money we’ve made!
  • We can really perform!

Think of this as the dating stage.  It is exhilarating and intense! There are probing questions and well-crafted answers.  Both parties want to achieve success and avoid failure / embarrassment. The same as in romance, the underwriter (girlfriend) will walk away if they find that the contractor (suitor) is dating other underwriters.  This is why bond producers may approach only one market at a time.  No girl wants a playboy who may be disloyal.

Ravishing Wedding Rings Clipart Also Appealing Wedding Rings Clipart Hd Pictures 4 Boostnow Wedd - ~ zxtzdb ~

Step Two

If the relationship blossoms, wedding bells may chime! They tie the knot with a pre-nuptial / general indemnity agreement that says “We’re in this together.  But hurt me and you’ll PAY.” 

Step Three

Eventually they become old married folks.  The contractor gripes that “he/she is never satisfied.”  More info, more questions, more money spent to keep the surety / spouse happy. It NEVER ends.  But the contractor needs the surety and works to keep things on track.

Is the underwriter frustrated?  Yes…  “I have to beat everything out of the contractor.  It’s like pulling teeth!” The contractor may be slow in providing the answers and info the underwriter needs to keep the bond account in healthy condition. “I thought we were in this together!”

There is an element of pain in the relationship, but both parties gain if they keep it together.

Yente  (Click for mood music) cupid

So where does the bond producer / agent fit in?  They are the dating service that brings the parties together.  They succeed by matching the contractor with the right surety.  The role as cupid continues as we shepherd the relationship forward, keeping the info flowing so bonds are available when needed.

The fact is, bonding involves more than paperwork.  It involves people, their perceptions and preferences.  The seasoned bond producer will make the match and guide the relationship forward for the benefit of all parties.  

Sureties, can’t live with them, can’t live without them.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

Secrets of Bonding #112: Net Worth – Feed the Pig!

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When it comes to Bid and Performance Bonds, you may have heard that Working Capital is a deciding factor.  If the calculated amount on the applicant’s financial statement is insufficient, the surety underwriter will decline the bond.pig3

So what is Net Worth (NW) and how important is it for bonding purposes?  Let’s start with a brief description of what this is and where you find it in the financial reporting.  Funny thing about net worth: It is a measure of the company’s financial strength, but it is listed among the company’s debts! Hmmm…

Where Do You Find It?

NW aka “Stockholders Equity” is listed on the company Balance Sheet, which is divided into assets and liabilities (debts). 

The assets include cash in the bank, accounts receivable, buildings, equipment, etc.  The liabilities are accounts payable, bank and other loans, other debts, and (in a corporation) the Stockholders Equity. The NW or Stockholders Equity section appears at the bottom of the Liabilities column, below “Total Liabilities.”

What Is It?

Stockholders Equity shows the funds put in (loaned to) the firm by the stockholders such as Capital Stock, plus the portion of all past profits allowed to accumulate in the company (called Retained Earnings). These comprise the corporation’s NW.

Why is it a liability?  NW is a liability because it is owned by the stockholders, not the corporation itself. If the company shuts down and is liquidated, the NW goes the stockholders and the corp reverts to its original financial position: $0.

pig2Think of NW as a piggy bank that holds the company’s long-term, ultimate financial reserves.

Now let’s discuss what this has to do with surety bonds. Bond underwriters always evaluate the Working Capital amount.  And many place equal importance on the NW.  While it is true that a company can show good Working Capital but have no NW, is a lack of NW really a concern?  You may assume it is difficult to get a bank loan with no NW, the same applies to bonds. 

Surety underwriters are concerned about a company’s staying power if they don’t have financial reserves to help survive tough times.  When companies fail, there are bond claims – exactly what the underwriters don’t want!

Analysts will wonder “Why is there no NW in this company?” especially if it is not a new entity.  Has there been a lack of profitability, a failure of management, and therefore no profits to accumulate?

Our “Secrets” articles are usually inspired by the file activity we enjoy each week with our valued agents. Such was the case this week.  Here is the actual info from a financial statement that was the seed for this article:  “(  )” indicates a negative number.

STATEMENT OF EQUITY, September 30, 2015

Balance at January 1, 2015               $            0
Plus: Member’s contributions               33,616
Less: Net loss                                          (50,597)
Less Member’s distributions              (131,060)
Balance at September 30, 2015       $(148,041)

This report is describing the changes in one part of the NW.  They started with nothing, put in $33 thousand, lost $50 thousand this year, and on top of that, took out everything they put in and more!  What are they thinking?!

Q. If you are the bond underwriter contemplating the likelihood of this company’s survival, what might you conclude?

  1. Company management is weak?
  2. Their ability to continue may be doubtful?
  3. Instead of bolstering the company with additional funds, the owners are stripping it of assets – maybe with the intention of declaring bankruptcy?

A. All of the above!

Our conclusion is that Net Worth IS important. In bonding, the company is the applicant.  Its financial position indicates if management has achieved profitability and accumulated a war chest of funds to provide a strong foundation.  Without it, future credit may be unavailable, and the company may falter when facing difficulties.

NW is one of the critical factors underwriters, and all credit analysts, review.  It should be nurtured, protected and preserved.

pig1

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.