How to Improve Your Financial Position to Qualify for Larger Surety Bonds

Securing larger surety bonds can open the door to more significant contracts and business growth opportunities. However, surety companies require contractors to demonstrate financial strength, stability, and reliability before increasing bonding capacity. If you’re looking to qualify for larger surety bonds, improving your financial position is crucial.

In this guide, we’ll outline practical strategies to enhance your financial health and increase your chances of securing larger bonds.

1. Strengthen Your Working Capital

Surety companies closely analyze your working capital, which is the difference between current assets and current liabilities. A strong working capital position indicates your ability to meet short-term obligations and sustain operations.

How to Improve Working Capital:

• Increase Cash Reserves: Build cash balances by improving receivables collection and reducing unnecessary expenses.
• Optimize Accounts Receivable: Implement stricter invoicing policies and follow up on outstanding payments to maintain liquidity.
• Reduce short-term liabilities: Avoid taking on excessive short-term debt and negotiate extended payment terms with suppliers.

Target Ratio: A current ratio (current assets ÷ current liabilities) of 1.5 or higher is generally preferred by sureties.

2. Boost Your Net Worth and Equity

A higher net worth signals financial stability and reduces perceived risk for sureties. Increasing your company’s equity makes you a more attractive candidate for larger bond limits.

Ways to Increase Net Worth:

• Retain Profits: Limit owner withdrawals and reinvest earnings back into the business.
• Reduce Debt: Pay down existing liabilities to improve your debt-to-equity ratio.
• Asset Revaluation: Ensure that your financial statements accurately reflect the fair value of your assets.

Tip: Sureties prefer companies with a debt-to-equity ratio below 3:1.

3. Maintain Strong Cash Flow Management

Cash flow is a critical factor in surety underwriting, as it determines your ability to fund ongoing projects and bond obligations.

How to Improve Cash Flow:

• Accelerate Receivables: Offer early payment discounts to customers to encourage faster collections.
• Negotiate Favorable Terms: Work with suppliers to extend payment terms and preserve cash.
• Reduce Unnecessary Expenses: Cut overhead costs and find efficiencies in operations.

Pro Tip: Maintain a rolling 12-month cash flow forecast to monitor trends and prepare for shortfalls.

4. Improve Profitability and Cost Controls

Sureties look for consistent profitability to ensure a contractor’s ability to complete projects successfully.

Ways to Improve Profitability:

• Cost Efficiency: Regularly analyze project costs and overhead to identify areas for savings.
• Diversification: Expand your service offerings or markets to reduce dependence on a single revenue stream.
• Competitive Bidding: Avoid underbidding projects that may lead to losses and financial strain.

5. Ensure Accurate and Timely Financial Reporting

Well-prepared, professionally compiled financial statements demonstrate credibility and transparency to sureties.

Best Practices for Financial Reporting:

• Engage a CPA: Have your financials reviewed or audited by a construction-experienced CPA to ensure compliance with accounting standards.
• Engage a knowledgeable bookkeeper and controller: Having accurate internal data is the first step to getting good-quality books for the CPA and underwriters.
• Use Accrual Accounting: The accrual method provides a clearer picture of long-term profitability compared to cash accounting.
• Maintain up-to-date records: Regularly reconcile accounts and prepare monthly financial statements.

Surety Preference: Audited financial statements are typically favored over internally prepared reports.

6. Strengthen Your Banking and Credit Relationships

A strong banking relationship can support your bonding capacity by providing access to lines of credit and additional financial support when needed.

How to Enhance Banking Relations:

• Maintain a Healthy Credit Line: Avoid maxing out credit facilities and ensure timely repayments.
• Build a Positive Banking Track Record: Maintain good communication and transparency with your lender.
• Provide Regular Financial Updates: Keep your bank informed about major projects and financial goals.

7. Reduce Debt and Leverage

Sureties evaluate a company’s debt levels to assess financial risk. High leverage can limit bonding capacity.

Debt Reduction Strategies:

• Pay off high-interest liabilities first.
• Consolidate debts to secure lower interest rates and better repayment terms.
• Avoid unnecessary borrowing that does not contribute to business growth.

Pro Tip: Aim to keep your total liabilities at a reasonable level relative to your equity.

8. Build a Strong Project History and Backlog

A positive track record of successfully completed projects reassures sureties of your operational competence.

How to Strengthen Your Track Record:

• Take on projects that align with your expertise and financial capacity.
• Document project performance, including profitability and on-time completion.
• Maintain a well-balanced backlog that shows growth potential but does not overextend your resources.

9. Improve Your Business Credit Rating

A strong credit score signals financial responsibility and reliability to surety companies.

Steps to Improve Credit:

• Pay bills and loans on time.
• Monitor your business credit report for inaccuracies and correct them.
• Maintain a diverse mix of credit sources to show financial stability.

10. Work with a Surety Bond Specialist

Surety bond brokers and specialists can provide valuable insights and guidance to position your company for higher bonding limits.

How a Bond Specialist Can Help:

• Assess your financial statements and recommend improvements.
• Provide advice on financial ratios and metrics sureties focus on.
• Advocate on your behalf to secure better terms with surety providers.

11. Demonstrate a Strong Management Team

Sureties assess not only financials but also the capability of your management team to deliver on projects.

How to Strengthen Your Management Team's Profile:

• Highlight experience and qualifications of key personnel.
• Invest in training and development to build expertise.
• Implement strong internal controls and project management systems.

12. Develop a Strategic Growth Plan

Sureties appreciate contractors who have a clear roadmap for business growth and risk management.

Elements of a Solid Growth Plan:

• Clear financial goals and targets.
• Expansion strategies for new markets and services.
• Risk management initiatives to safeguard profitability.

Conclusion: Take Proactive Steps to Increase Your Bonding Capacity

Improving your financial position requires proactive planning and disciplined financial management. By focusing on cash flow, profitability, and financial transparency, you can increase your chances of qualifying for larger surety bonds and taking on more substantial projects.

If you need assistance preparing for larger bonding requests, consider partnering with a financial consultant or CPA with expertise in construction and surety bonding.