I bet the first answer you thought of is: “Because bonds are a hassle.” Yep, they sure are.
But 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 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.
- 1. a record of profitability
2. a record of on-time job performance
3. CPA prepared financial statements
4. a good accounting system and good job costing
5. a good banking relationship and the ability to borrow money
6. adequate insurance
7. a succession plan
8. no history of bankruptcy
9. good cash liquidity
10. good working capital
11. low debt to equity
12. good and fair contracts
13. a strong personal financial statement
So which contractor would you choose? One who is bondable? Or one who is not? And if you’re a contractor, which would you rather be?
About me: 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.
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.
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.
Matchmaker – I know the surety market, surety appetites and capabilities and the various underwriter’s perspectives and biases. And 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 really that hard. It’s a discipline of thought that helps you build a platform for growth and enhanced profitability. And who doesn’t want that?