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Titled: What Bonding Companies Seek in a Balance Sheet
What Bonding Companies Seek in a Balance Sheet
Article Summary: Article explains what bonding agents look at from a financial perspective in determining a commercial construction company's bonding program, and why. This includes balance sheet strength, working capital ratios, credit lines, etc.
Other things bonding companies look at to determine the bonding program are the list of jobs on hand and the year in perspective. Does the company average jobs of $200,000-$300,000 but occasionally garner projects of $1.5 million? Is there a large job that’s scheduled to commence in a couple of months? Assuming the larger projects are also fully bonded, the bonding program should reflect this pattern otherwise the construction company would have insufficient bonding capacity on a per project basis to cover the larger projects. Consequently, bonding agents look at the spectrum of jobs performed and anticipated for the year and those from the previous year, the contract value of each job, and the length of each job.
Bonding companies seek a 3:1 debt ratio on the balance sheet. Therefore, whatever you can do to decrease your debt will improve your ratio. As stated previously, you or an investor or partner can inject equity capital. You can pay off a term loan. You can restructure existing loans. However, bonding companies can tailor the bonding program to fit the balance sheet. If all your jobs are fully bonded, this could pose a problem. If only some of your projects are bonded, the tailored bonding program may meet your needs.
In addition to SBA-guaranteed bonds, another way for up and coming companies who have had difficulty procuring bonding to obtain some bonding capacity is through 3rd party indemnities. These can be provided by the seller if you are buying a company, by an investor, or by a joint venture or other partner.
Bonding companies strongly prefer reviewed financials. Of course, if they can get audited financials, that is the strongest preference but bonding companies understand that the cost difference between audited and reviewed financials is significant – often several thousand dollars. For a long-term customer, bonding companies may take CPA-compiled statements. However, when that customer seeks more steady bonding or presents a weaker balance sheet, the bonding company will want to switch to reviewed financials. With reviewed financials, the bonding company can be certain that the financials presented to them are accurate and reflective of the company’s true condition. Why audited or reviewed? With Quickbooks only data, a company’s owner or CFO may add false data, delete information, or manipulate timing to make their statements look better. Or they may simply make mistakes due to unfamiliarity with generally accepted accounting principles (GAAP). With no credible outside source (CPA) reviewing the information, the bonding company cannot be certain. CPAs and their accounting activities are regulated. Private company owners and CFOs are not. (Of course, outright fraud is always illegal but can be difficult to prove unless glaring.)
Most bonding companies like personal guarantees or other guarantees to 100% of the bond. Remember, bonding is NOT insurance. Bonding, unlike insurance, is not a risk product. Bonding’s purpose is to ensure that the project continues with minimal hiccups as smoothly as possible. In the rare instance that the bond is called upon to pay, the bonding company expects full reimbursement of their payouts, up to the bond limit. In general practice, if the bond company must pay out, to the extent that it was their customer’s fault through overt negligence or fraud, the bond company will pursue full repayment. To the extent that it was not their customer’s fault AND the customer helps them as much as possible to mitigate the payouts, the bond company will pursue only partial repayment.
Article Source: http://www.upublish.info
About the Author:
Tiffany C. Wright
Tiffany Wright is a turnaround consultant and small business advisor who has written several books and ebooks. She is the author of Help! I Need Money for My Business Now!!, an ebook with easy-to-follow examples, case studies, and templates that will lead you step-by-step through the process of raising capital for your business available at http://www.moneytogrowbusiness.com . She is also the publisher of Equal Construction Record, a commercial construction newspaper based in Georgia. She has helped companies raise over $31 Million in financing and revamp their operations and financial structure. Also view her blog at http://smallbusinessfinanceforum.blogspot.com .
Keywords: construction+bonding, bonding+program, bonding+companies, bonding+agents, bond+company, reviewed+financials
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