How Improving Equity Impacts Your Bond Program

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

In our current series of articles, we are taking a deeper look into the properties of a balance sheet that will affect a contractor’s bonding capacity. We have previously discussed bonding capacity and summarized working capital in regards to the impact it can have on a contractor’s capacity. However, another very important component on the balance sheet that surety underwriters will consider is net worth, also referred to as equity.

Equity is calculated by subtracting a company’s total liabilities from their total assets on the balance sheet, and is a measurement that is used to determine their long term liquidity. From a bonding standpoint, surety underwriters love to see equity increase year after year. They analyze each item in the equity section of the balance sheet such as common stock, additional paid in capital, and shareholders’ loans. One item that carries a particularly large amount of weight is retained earnings.

Retained earnings represents the net income or profit that a company reinvests in its business after distributions are paid to the shareholders. This is important because as a general guideline we say a contractor can qualify for an aggregate bonding capacity that is ten times their company’s equity. Thus, their retained earnings heavily influence the overall equity of the company. Contractors looking to maintain a strong bond program, or increase their bond program, will want to retain as much profit in the company as they can. This allows their retained earnings and their equity to continue to grow through the years, making it even more important to have a knowledgeable and proactive bonding agent on your side. This should be someone who understands your business and overall goals, can analyze your balance sheet, and will discuss strategies with you to reach optimal capacity.

For many contractors, building a strong bonding capacity can create opportunities for significant revenue growth. Perhaps one of the more critical elements to note as you review your balance sheet is being educated on the importance of having strong retained earnings inside your financials. You can start this process and leapfrog your competitors when you request a quick capacity analysis from our surety team. They’ll provide you with a detailed evaluation.

To answer more questions about your bonding program, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166 and we can get started.

A Contractor’s Guide to Bonding Capacity

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

For contractors that do a lot of bonded work, their bonding capacity is a critical element of their business. Capacity often determines which projects a company can and cannot pursue, so it is managed very closely. However, for contractors that are new to bonding or have not bonded previously but remain interested in performing bonded work, this is likely a foreign concept to them. So, what is bonding capacity, and what items determine the amount of capacity that a surety carrier is willing to offer?

Generally speaking, a contractor’s bonding capacity is comprised of single and aggregate limits, where the surety underwriter will approve performance and payment bonds for a job, up to the single limit. The aggregate limit is the cap that the surety carrier sets for how much total bond liability a contractor can have extended at one time. Having these caps is what makes it important for contractors to have an understanding of what information sureties use when determining how much capacity to offer. Underwriters will look at personal and business credit, industry experience, as well as personal financial wealth. Typically, though the most important item a surety underwriter will focus on is the company’s financials, specifically, their balance sheet and income statement. 

When reviewing the balance sheet and income statement, two important items that an underwriter will be reviewing are the contractor’s working capital and their equity. We took a deeper dive into working capital in a previous article, but simply put, working capital represents a contractor’s current assets minus current liabilities, and this measures how much a company has available to pay its current debts. Equity, or net worth on the balance sheet, is made up of retained earnings, common stock and additional paid in capital, and these numbers provide a measure of the long term liquidity of a company. Surety carriers take a hard look at this number because they want to ensure that there are sufficient reserves to complete the work that they have issued performance and payment bonds on.    

Building an effective bonding program can take time and requires collaboration with competent, trusted advisors. Determining what type of bonding capacity you can establish and/or deserve is a key part of the process. To find out what your bonding capacity looks like, request a quick capacity analysis and I will provide you with the information you need for your company. To answer more questions, you can email be at aroberts@ranchomesa.com or call my direct line at (619) 937-0166. Stay tuned for my next article which will take a deeper dive into strategies for improving equity and how this can increase capacity.

Contractor Strategies to Maximize Your Bank Line of Credit

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

Some of my most successful bond clients opened their construction business with a good amount of working experience on their resume, but only a minimal amount of cash and capital. Unfortunately, bond companies like to see a strong amount of cash and capital. Therefore, my goal, as their bond agent, is to work with what they have at the present time to explain why they are a “good risk” now for bid, performance, and payment bonds - along with ideas on how to overcome the initial cash and capital constraints.

As a contractor grows and is looking at larger single and aggregate bond programs, I make it a point to work with the contractor on upgrading their financial presentation along with the goal to qualify for a Bank Line of Credit. It can sometimes be difficult to qualify for that “first” bank line of credit.

We want to help! On Friday, September, 28th, we will be inviting a local bank professional to cover "Contractor Strategies to Maximize their Bank Line of Credit." Our goal is to answer some of the following questions to prepare the contractor for a favorable submission process with the banker:

a)    What is the typical information needed from the Contractor to apply for a Bank Line?
b)    How do I determine what size Line of Credit I should ask for?
c)    What are the “key” underwriting areas you will concentrate on?
d)    How long after we provide you the information should we expect an answer?
e)    To qualify for a line of credit – do we need to move our checking account to your Bank?

The seminar will allow us to pull back the curtain with the banker to make this process as seamless and painless as possible. The seminar will provide the contractor an opportunity to ask the questions you might have avoided because you assumed you did not qualify.

If interested, please register online or contact Rancho Mesa Insurance at (619) 937-0164.

Small Performance Bonds No Longer Require CPA Financial Statements

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In the past, many Surety Bond carriers required financial statements from a Certified Public Account (CPA), bank lines of credit, tax returns, etc. for contractor bond programs, whether the client required one bond a year or a large bond program. This is no longer the case.

Several “A” rated carriers now provide “personal credit based scoring” to approve single bonds of $350,000 up to $500,000. There is no need for company financial statements. Instead, the contractor completes a “fast track” application, which requests personal financial information about the owner(s). The bond company will run the personal credit of the owner(s). If the owner(s) personal credit is decent, the bond will be approved. A response is provided within 48 hours of submission. 

The program responds to requests for bid bonds, performance and payment bonds, and letters of bondability. Several carriers provide a “pre-qualification” feature so you can determine if you will qualify for the bond before you bid or negotiate a project that will require a bond. This pre-qualification feature is helpful for owners that are aware they have low credit scores.

So, if you are considering a project that requires a bond and you are not a big fan of collecting a lot of paperwork for one project – don’t fret.  We may have a solution to help you win that job!

Contact Rancho Mesa Insurance Services, Inc. at (619) 937-0164.

Increase Bonding Capacity Through Jobsite Pictures

Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.

A picture may be worth a thousand words, but it can also be worth hundreds of thousands of dollars when it comes to bonding a new construction project. Let me explain the bonding process and how a few pictures can free up a contractor's bonding capacity.

For Construction Bonding Programs, we typically provide a Single Project Limit and an Aggregate Surety Program to guide our clients with pre-approved parameters they can use to bid on projects that require bonding. Although many factors come into play when providing a single project limit, the general rule is 1½ times the largest project completed to date.

The Aggregate Program is made up of the “Cost to Complete” for all bonded and non-bonded projects the contractor has open. To compute the cost to complete, take the estimated cost of the project less the cost to date listed on the work in progress schedule.

One way the agent and bond company can check on the progress of a particular project is by sending a status form to the owner or general contractor. The status form is used to determine how much work has been completed to date.  It also includes a comment section to report any problems on the project.

Proving a project is progressing is highly important for a contractor, since it can free up their bonding capacity and allow them to get bonding on additional projects. But, what happens when the owner of a project doesn't return the status form in a timely manner and the contractor needs to free up bonding capacity in order to get bonding on another project? 

Case Study

Recently, Rancho Mesa was looking for a way to fit a new bonded project into a contractor’s aggregate program, which was almost at capacity. 

In an effort to speed up the process of releasing bonding capacity, the contractor provided pictures (from various angles) of one of his current bonded projects. The pictures showed that several sections of the project were complete. This allowed Rancho Mesa to confirm with the bond underwriter that over 60% of the project was complete. Thus, the underwriter was able to release over $750,000 of capacity to be used on the new project that required bonding.

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While the preferred method to release bonding is to get a signed status report from the owner; sometimes, a few pictures from the jobsite can help quicken the process, while we wait for the signed document.

For questions about Surety, contact Rancho Mesa Insurance Services, Inc. at 619) 937-0164.