As a contractor, surety bonds are your ticket to tackling exciting private and public construction projects. They give project owners and regulatory agencies peace of mind that you’ll deliver on your promises.
Your bonding capacity determines the size and amount of surety bonds you can obtain. By boosting your bonding capacity, you can unlock opportunities to bid on larger projects and amplify your earning potential.
So, how can you boost your bonding capacity? Below, we’ll define bond capacity and explain its key components. After that, we’ll offer ten steps to increase your bonding capacity over time.
Bonding capacity is the amount of credit your surety company will extend to you. Having a higher bonding capacity allows you to bid on larger projects. In contrast, a low bonding capacity can limit the number and scale of projects you undertake.
There are two categories of bonding capacity you may want to increase:
In many ways, bonding capacity works like a credit card’s credit limit. Your surety company can adjust your bonding capacity as their confidence in your overall performance increases. Additionally, you can request a boost after updating your financial information and demonstrating strong project management skills.
Surety companies consider the three C’s when setting contractors’ bonding capacity: capital, capacity, and character. Let’s explore each of these components in greater detail:
Capital refers to the cash or cash equivalents you have to meet your immediate financial obligations. Surety companies want to see that you have enough liquidity to manage your ongoing expenses and any unexpected costs that may arise during project execution.
As a result, your surety company will carefully assess your:
Capacity refers to your ability to complete projects effectively and manage their associated risks. Surety bonds evaluate this component using the following factors:
Lastly, surety companies consider your character as a contractor when setting your bonding capacity. Along with having a proven history of completing projects successfully, you also want to provide evidence that you operate with integrity and overcome challenges without cutting corners.
Now that we’ve clarified what bonding capacity is and how it’s determined, here are ten practical steps to help you increase yours over time.
Since your financial stability is such a crucial factor in determining your bonding capacity, it’s important to maintain detailed documentation of your business finances. Most surety companies require three to five years of third-party-vetted financial statements to assess your bonding capacity.
If your financial documents have room for improvement, you can enhance your financial standing by:
Surety companies carefully review your backlog before increasing your bonding capacity. Your backlog includes any projects you have under contract that haven’t been completed yet.
Generally speaking, surety companies want to see that you have capital equal to 10% of your existing work backlog. This means if you currently have $1 million of projects in your backlog, you would need $100,000 of liquid assets to satisfy these capital requirements.
Did you know that more contractors struggle financially during economic expansions than recessions? That’s because it’s easy to run out of cash when you have a bloated backlog.
By securing ample lines of credit, such as a business line of credit or home equity line of credit, you can ensure you have the cash you need to pay for unexpected project expenses.
While your finances are crucial, they’re ultimately a byproduct of the quality of your work. Thus, it’s equally important to prioritize your project management. You can do so by:
Speaking of risk, your subcontractors and suppliers’ performance can impact your project outcomes. Their mistakes can lead to delays, jeopardizing your deadlines and budget. To mitigate these risks, ensure you thoroughly evaluate subcontractors and suppliers, choosing only those who are bonded, insured, and trustworthy.
After a job well done, make sure to ask your clients for reviews, testimonials, or references. This social proof can improve your reputation with your surety company and help you acquire more business.
Another way to enhance your reputation is to network with other respected contractors. For example, you can attend industry events, such as trade shows, conferences, and workshops, or join professional associations. Additionally, you can propose strategic collaborations with other contractors from time to time.
Not all surety companies are created equal. Some may be more willing to extend higher bonding limits than others. By doing your research and shopping around, you can find a surety company that aligns with your goals and understands your needs. After that, make sure you establish a positive relationship with their underwriter from the start.
Surety companies typically won’t grant you a high bonding capacity right away. Even if you have an excellent rapport with your surety company, you can’t expect to jump from $500,000 of bonding capacity to $50 million overnight. Instead, you must stretch your bonding capacity gradually by showcasing steady improvements in your financial stability and performance.
Bonding capacity is a vital aspect of your business, so it should always be a top priority. To ensure you have the necessary capacity when needed, request increases well in advance rather than waiting until the last minute.
Additionally, it’s a good idea to provide your surety company with regular financial updates. Doing so can help you obtain more frequent bonding capacity increases.
While increasing your bonding capacity takes time, it can significantly improve your earning potential and profitability down the line. If you have any more questions about this process, don’t hesitate to reach out to the surety bond experts at BOSS Bonds.
Our team can guide you on your path toward higher bonding capacity, providing expert guidance and responsive support every step of the way. With decades of experience under our belt, you can trust that we have the expertise to navigate any challenge.
Ready to start boosting your bonding capacity? Contact a BOSS Bonds specialist today.
Sources:
Surety.org. Contract Surety Bonds: Protecting Taxpayer Dollars.
https://surety.org/wp-content/uploads/2021/11/Contract-Surety-Bonds.pdf