Surety Bond Associates

A contractor’s aggregate bond limit is largely determined by their firm’s working capital, net worth and leverage positions as reflected in their fiscal year end financial statements. The year end statement is a tool primarily used to establish the following year’s bonding program with an interim statement, typically six months from the year end, used to support the same or possibly an increased capacity.

Proper planning is critical. As the end of the year nears, we recommend planning in advance  with your CPA to be sure that the numbers and ratios are strong enough to support the credit that you need.  Keep in mind that your fiscal year end statement will be the basis for your bonding credit for the entire year.  Also, results reflected on this financial statement will follow you for three to five years since banks and bonding companies typically look for three to five years of financial history prior to making a credit decision.  

The aggregate limit is the dollar value of the total work program that a surety feels comfortable supporting a contractor.  This generally includes both bonded and unbonded work.  It is not the accumulation of the contract prices, but rather the evaluation of the costs that need to be incurred from the current date to complete the contracts in progress.  Since the aggregate level is largely determined by a firm’s financial statement, it is critical that these financial statements be as strong as possible.  Generally speaking, surety companies are looking for a balance sheet working capital position (i.e. Current Assets minus Current Liabilities) equal to at least 10% of a contractor’s aggregate limit.

We recommend making that first impression of the financial statement to be a favorable, long lasting one.  Of course, there are a number of issues that need to be addressed in this process:

1) First, tax-planning.

2) Second, the firm’s true financial position.  It is easier to make your firm look good when your firm is truly enjoying a good financial position.  If the firm is on the brink of bankruptcy, very little window dressing will hide this. 

3) Third, full disclosure CPA prepared financial statements including footnotes and supporting schedules are essential.  The percentage of completion method of accounting is always preferred by the surety.   CPA reviews are required for most bond programs over a $500,000 aggregate.

The balance sheet is simply a snapshot of a firm’s financial position at a particular point in time.  Cash could be zero on December 31st and $1,000,000 on January 2nd.  The firm has not changed except that a $1,000,000 account receivable came in.  Still, aesthetically it looks better to have $1,000,000 in cash versus zero.  Of course, if your firm recognizes revenue on the cash basis for tax purposes, tax planning may dictate bringing the cash balance as low as possible.

As long as it is not contrary to tax planning:

• Cash should be maximized. Cash is king, no doubt about it. Nothing is more important to a bonding company than liquidity. Yes, it is true that when you do this at the end of the year your accounts payable will be higher than if you used your cash to pay them. The working capital number does not change, but cosmetically, its looks better to have more cash.
• Receivables, especially those over 90 days, should be collected.  Work very hard in the last month or so to collect as much money as possible.
• Projects should be billed as much as possible.  It is preferable to be overbilled on each project rather than underbilling, especially if your cash balances are very strong. Underbillings often raise concerns about a project’s profitability.
• Inter-company transactions should be eliminated as of the date of the Financial Statement.  Again, the goal is to keep the balance sheet of the construction company as clean as possible.
• Loans to shareholders and employees should be cleaned up by the end of the year. The bonding company will not consider these amounts in their analysis.  This could have a serious impact on the credit granted.
• Bank debt should be reduced as low as possible, preferably to zero.  This implies that you are not too dependant on the bank.
• Defer ‘all cash’ equipment purchases or purchases that require significant down payments.  Equipment is a “long-term” asset which does not contribute to your working capital calculation.  What is actually reflected on the financial statement is a replacement of a current asset, cash, with a long-term asset, negatively affecting working capital.  Also, whenever possible, consider using long-term financing.
• Try to keep stockholder distributions to a minimum.  If you are an “S” Corp., try to take distributions only in an amount sufficient enough to cover any tax obligations.  It is your money, but it is important to keep enough in the company to support the credit you need to operate and grow your business.

These ideas are designed to present your company in as favorable a light as possible.  If your goal is to increase your firm’s bonding capacity, then you will probably pay slightly more in income taxes.  Sometimes it comes down to:  Do you want to increase bonding capacity or not pay taxes?  Ultimately it is a business decision that only you can make.  If you are interested in maximizing your bonding program, please give us a call at 610.617.1052 or email us at ellen.neylan@suretybondassociates.com to discuss further.

The Korean Seventh-day Adventist Church was supposed to be in business in Columbia by now.

The church’s 150 members signed a deal, put money down and watched bulldozers roll. But construction stopped in late 2008 and the congregation never recouped its investment. Thanks in part, church officials say, because a bond that was supposed to insure the project didn’t pay off. The worshippers now borrow a building from a sister church, meeting in the afternoon after the other congregation worships in the morning.

Where prayer fails, sometimes regulation succeeds. The church’s problems are being held out as evidence that the state needs to increase oversight of wealthy individuals guaranteeing small contractors who can’t get backing from licensed corporate surety companies.

These “individual sureties” and their brokers are pushing back, seeking legislation that would allow them to continue to back construction without regulation by the Maryland Insurance Administration.

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The U.S. Small Business Administration has made regulatory changes to its Surety Bond Guarantee Program, including higher surety bond guarantee limits up to $10 million that will help construction and service sector firms secure larger contracts for work in areas impacted by disasters.

SB 2913 would subject mobility dealers to the existing licensing and bond requirements for motor vehicle dealers. Mobility dealers are those who sell more than five mobility vehicles in a year. Such vehicles are specially equipped to transport a person with a disability and include mechanical devices such as wheel chair lifts or ramps. Current law requires motor vehicle dealers to post a $10,000 bond if they sold less than 200 vehicles in a calendar year, and a $25,000 bond is required if the dealer sells more than 200 vehicles in a calendar year.

SB 708 would require debt settlement service providers to be licensed and post a $200,000 surety bond conditioned on the licensee’s compliance with the proposed law. The bond would secure the payment of any funds owed to persons damaged by the provider s noncompliance with the law or any funds owed to the State for violations. An insurer authorized to do business in the State would have to issue the bond.

SB 741/HB 1022 would require debt settlement service providers to register and obtain a $50,000 surety bond. The bond would have to be issued by a surety company authorized to do business in the State. The bond would be conditioned on compliance with the applicable state and federal laws and regulations. Both chambers passed a bill and later passed a conference committee report containing these bonding provisions.

SB 42 bill pending would require mortgage loan modification service providers (service provider) to register and post a $100,000 surety bond. The bond would run to the State for the benefit of the Attorney General and any consumer suffering damages as a result of the service provider s wrongful act, omission, default, fraud or misrepresentation committed in the course of business.

SB 1110 would revise the existing licensing laws for mortgage lenders, brokers and originators. Existing law requires a minimum $40,000 surety bond. The law requires the bond amount to reflect the licensee’s loan origination volume and is to be set by regulations. Instead, the bill would require mortgage lenders and correspondent mortgage lenders to post a minimum $100,000 surety bond mortgage brokers would have to post a minimum $50,000 bond. The initial bond would be for the licensee’s initial license for the main office. The licensee would have to obtain a bond that covers all loan originators that the licensee sponsors at all locations.

SB 392 requires contractors organized as limited liability companies (LLCs) to post a $100,000 bond as a condition of an LLC business license. The bond is for the benefit of any employee damaged by his or her employer’s failure to pay wages, interest on wages or fringe benefits. Further, if the licensee is a party to a collective bargaining agreement, the bond must cover welfare fund contributions, pension fund contributions and apprentice program contributions. The new law exempts qualifying individuals from the contractor license bond requirements if the individual held a 10% membership interest in a limited liability partnership. Current law requires a surety bond in the amount of $12,500 for contractors.

AB 359 would regulate foreclosure consultants. The bill would require such consultants to post a surety bond in the amount that the Director of the Division of Consumer Affairs prescribed by regulations. Such consultants would not include banks, savings banks, savings and loan associations, credit unions or other federally insured financial institutions or insurance companies. Also exempted would be those licensed under the “New Jersey Licensed Lenders Act,” and those licensed as a real estate broker, broker salesperson or salesperson. The bill now has passed the Assembly and has been sent to the Senate Commerce Committee.