Why Some Contractors Hate Surety Bonding
By Fritz Archerd, Managing Advisor
How to Get a Surety Bond
I bet the first answer you thought of is: “Because surety bonding is a hassle.” Yep, it sure is.
However, here’s the biggest reason some contractors hate surety bonds: They can’t get them.
It’s hard to qualify for surety bonding. Think about it; You have to be able to convince someone (the surety company) that they should guarantee to your customer that you will finish the job and fulfill your contract. And to be responsible for all of the costs to do just that, in the event you fail. And that if they do that, you will be able to repay them. And that they will do all of that for a very small fee.
Most contractors can’t do that, and that’s why they hate bonds.
They don’t like to grow the net worth of their business. To do that means delayed gratification – putting off buying that new F-150, the fast boat, the jewelry, the vacation home. They rely on bank debt to finance their work, and cash is always short. If everything goes right in a job, they will be fine, but they don’t have the financial strength and stability to survive, maybe even just one, bad over-run job.
Here’s what a contractor has to have in order to qualify for bonding.
- A record of profitability
- A record of on-time job performance
- CPA prepared financial statements
- A good accounting system and good job costing
- A good banking relationship and the ability to borrow money
- Adequate insurance
- A succession plan
- No history of bankruptcy
- Good cash liquidity
- Good working capital
- Low debt to equity
- Good and fair contracts
- A strong personal financial statement
I help my clients make money by building and maintaining durable surety relationships. I do that by being your (a) Translator (b) Business Consultant and (c) Matchmaker.
(a) Translator – I am the guy who takes what you do and translates it into the surety’s language and, conversely, interprets the surety’s needs and concerns into understandable and actionable items.
(b) Business Consultant – I bring you solutions to your business and surety issues. Drawing on years of experience to make suggestions about balance sheet structuring alternatives that will maximize bonding capacity, sharing what the sureties like to see in your financial statement disclosures and advising on how to negotiate fee structures and general indemnification agreements.
(c) Matchmaker – I know the surety market, surety appetites, capabilities and the various underwriters’ perspectives and biases. In the end, I am the guy who matches the business values of my client and the surety.
So, when you look at the big picture, surety bonding isn’t that hard. It’s a discipline of thought that helps you build a platform for growth and enhanced profitability. Who doesn’t want that?