By Joshua Etemadi, Assistant Vice President
- Did you know that working capital is one of the primary factors in determining your bond program? The majority of bonding companies rely heavily on working capital to determine your bonding program. Working capital is taken from your balance sheet, and simply put, it’s comprised of cash, accounts receivables, and underbillings – less your current debt – like credit cards, your bank line of credit, accounts payables, and overbillings. To determine your program, most bond companies take the working capital number and multiply it by 10. However, did you know there are programs available (SBA Bond Guarantee Program) where you can multiply that same number by 20 to double your bond program?
- Working capital is important, but it isn’t everything! While the majority of companies rely on working capital, there is an emerging market in net worth underwriting. In other words, you may have a lot of personal or corporate assets (real estate, for example) that bond companies can use to support a larger bond program.
- Your line of credit is your lifeline. When you’re looking at a larger job, it may not be evident at the time you’re bidding it, but the cash flow needs on a big job are always more than anticipated. Having a line of credit to support those first 60 – 90 days are critical, especially in the event you don’t get paid on time. There are programs (SBA, see above) that will count your bank line as an additional form of working capital, working to increase your overall capacity.
- Financial statements prepared by CPAs are important, but not always necessary. Depending on the situation, you can still get bonded for projects up to approximately $2 million, even with internally prepared financial statements.
- There aren’t any secrets in this business. If you make money, retain your profits, strengthen your balance sheet, improve your financial reporting and incorporate recommendations from your bond agent, you will increase your bond capacity and enhance your bond program.
If you would like to discuss any of the Top Five with us, contact a member of the Construction Bonds, Inc. Team at 703.934.1000. We look forward to hearing from you.