How to maximize your bonding capacity

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In this week’s episode, Stephen, Wade, and Rob discuss what you can do to increase your bonding capacity – and what things could work against you.

We cover the responsibility of your bond agent vs. the responsibilities of you as the contractor, why it’s crucial to work with a CPA to have good financial records, how much liquidity you need, how past jobs can help boost your bonding capacity, and the importance of good relationships in the process. Wondering how your personal net worth factors into your bond capacity? We cover that question, too. 


Rob Williams: [00:00:00]   

 Welcome to the Contractor Success forum. Today, we are talking about maximizing your bonding capacity and we have with us Wade and we have Stephen and these two guys are the contractor gurus and CPA work w uh, Carpenter CPAs, and Stephen Brown with- T-tell us who you’re with.

Stephen Brown: [00:00:32] McDaniel-Whitley Agency.

Rob Williams: [00:00:35] All right. And uh, you are the bonding agent, Stephen. So you are Mr. World renowned, famous bonding guy. 

Stephen Brown: [00:00:45] I wouldn’t go that far.

Rob Williams: [00:00:46] I was really excited today to talk about maximizing the bonding capacity, because I know when I was a contractor one, I just couldn’t even believe… I thought it was going to be very hard to get a bond in general for commercial contracting, because I had that little residential contracting bond that was really just a rubber stamp, and to get these commercial jobs, I was very intimidated by it. And I was very surprised when you comforted me and got me through that process so easily.

But then I was wondering about maximizing the bonding capacity and what jobs I could do and what jobs I couldn’t do, because that was a limit to my revenue for the year. It was my bonding capacity.

Stephen Brown: [00:01:34] Yeah, well, Rob, that’s what the the surety bonding companies call your  bond credit line, you know, it’s called your surety capacity. And a lot of times when you’re doing government work or for work for a GC, they want a letter from your bonding company, wanting to know your your line of surety credit and how much per job and how much aggregate, like a million dollars per job, $2 million aggregate, you know, that’s what they want to know.

So maximizing surety capacity or maximizing your bond credit is my job as your bond agent, but it’s also has a lot to do with what you’re willing to do. And a lot of what I need to do my job right is what you need to do to do your job right as a contractor. So, you know, it’s all about relationships, I’m a matchmaker. 

Rob Williams: [00:02:25] Yeah. 

Stephen Brown: [00:02:26] But having been a bond underwriter before I do know how they think, and I know how they how they feel about the risk that they’re taking. We represent multiple markets and our job is just to find the right underwriter to give you the most capacity at the best terms.

Rob Williams: [00:02:43] I was reading your article about  maximizing bonding capacity, Stephen, and we were talking about the financials. You were talking about the financials and it reminded me of when I look at somebody’s financials for Profit First, and I see that, and I’ll look at the numbers and then I see what they have said. And then just said, wait. This doesn’t make any sense these numbers I’m looking at and what you’re telling me. You had said in your article, Stephen, how you-it’s so important to have a good CPA to get a set of books. So maybe we hear from Wade first, but then I also want to hear from you when you see something, maybe both of your opinion, you see a set of books that don’t make sense. What, what are you thinking about that in maximizing the bonding capacity? What do you do with that?

Wade Carpenter: [00:03:29] Obviously Stephen’s the expert in this area, but after 30 years of doing this, I can  tell you that, the relationship  between the CPA and sometimes between the customer and the bond agent can go a long, long way and,  I think number one, they’ve got to like you, they’ve got to trust you, that trust that you’re giving them good numbers. That you’re consistent, and some of the things that you know, can shoot that trust is giving them bad information. 

 Stephen Brown: [00:04:01] When I used to be a bond underwriter, I’d get a stack of submissions on my desk and there’d be certain CPAs, and I knew I could move them to the left of the stack because of their reputation. I knew everything was gonna be done right, it was going to be represented the way I needed to analyze it. And I would take that financial information and not have to input that information into our underwriting systems. 

Sometimes we’d come across financial statements that just made no sense whatsoever. And you can’t get bonds that way. So, the number one thing that I say to increase your bonding capacity is make sure that you’ve got that CPA and accounting system in place that you can produce at any time that your bond agent needs it to try to get a bond approved. A month ending balance sheet and income statement with work on hand, or WIP, work in progress report that shows the jobs you’ve completed since the last statement, the jobs you closed out and the jobs you have in progress, because if you don’t show that and it doesn’t show over and under billings on your Balance sheet, Then you’re losing all that surety credit you could be getting from the backlog gross profit that shows up on your statement. So that’s one thing that the bond underwriters look at. 

Another thing  to increase your surety bond capacity is to have 10% of whatever jobs you’re bidding in the form of liquidity or working capital; that’s cash, accounts receivable, anything that’s considered liquid are fairly easy to turn into cash. If you have that in there, there’s already a comfort level. And then you have good financial statements on top of that, or well prepared financial statements, even if the numbers aren’t what you want them to be, they’re accurate. Then that’s the basis of of getting a relationship started.

The whole key to maximizing your bond credit is to get a relationship started. And by that, I mean, meet your bond underwriter, not your agent. You want to underwriter that knows how to underwrite, and  doesn’t just process bonds based on the information they put in a computer, but they know you personally, that way you get better rates as well, better terms.

And then the second thing is you need to maintain that relationship by having meetings once a year to go over the financials, talk about questions that they have. It’s always great. If you can have your, your comp troller or CFO there in that meeting. CPA is ideal as well in that meeting to answer any questions they might have about how something was posted, but that’s worth its weight in gold. So you have to maintain a relationship with the underwriter, and it’s the job of your surety agent to make sure that gets done. So you need to ask for that. If you haven’t met your bond underwriter yet that’s not good in the longterm. 

And then finally, you need to mature that relationship. And  you can’t speed that up, it takes years to accomplish, but that’s the best of all worlds. That’s when your underwriter and your home office underwriter, they’re all pulling for you, whatever you want to do, if it makes sense to you, it makes sense to them.

And that is how you maximize your bonding capacity. And then I had in that article, some other tips as well. Wade, have you had that situation where you’ve met with a bond underwriter –

Wade Carpenter: [00:07:22] Oh, all the time. A lot of times we’ll talk to them before the end of the year. And, you know, just talking about in the planning stages, like, what do we need to look like? And we try to engineer it if we can, but  the relationship is key and some of the things that will shoot a relationship in the foot is if you give them bad information.

I had a situation in the last two weeks where a client gave their  in-house financial statement to the bond agent. And the receivables and the payables didn’t tie to the balance sheet. And he also created his own personal financial statement and, didn’t know that was supposed to add up and he put $3 million of the company’s receivables on there.

It really kind of set him off on the wrong foot with his bond agent. So, the other thing is, the ability to estimate. If you consistently at the year end give your CPA a huge, you know, you’re going to make a ton of money on this job. And then the next year it comes in and it’s made a fraction of that, or even lost money that shoots you in the foot with the credibility, with your bond agent.

Stephen Brown: [00:08:34] Right. And if you’re going to have a profit fade or you have other situations come up, you need to let your your bonding agent know that and maybe bring your surety underwriter in just to make sure that there’s no surprises. You know, it’s okay if- it’s not okay if you lose money on a job, but it happens and  it doesn’t kill your chances of getting bonding. It’s how you respond and what systems you have in place. Things happen. Everybody knows that, but when you have good accounting records, you’re able to show someone the big picture very quickly. And you don’t drag it out. Now, if you want to drag out bad news and keep getting bonds and hold that to yourself, then that’s fine. But you’re going to lose that relationship that you worked to build up. And when you really need the bonds you’re not going to be able to get them and you won’t know what happened.  

And then also Wade and Rob, you know, contractors think that the bonding companies really are bonding them individually. Hey, I got all this money personally. You know, so-and-so’s worth a whole lot more than it shows on paper, if you know what I mean. Come on. That doesn’t impress anybody when getting bonds. They’re bonding your company.

So, yes, a lot of bonding companies, most of them are acquire that you signed personal indemnity to backup your bond. It’s just a little extra layer of protection. But it’s having working capital and net worth your company that gets the job done, Rob.

Rob Williams: [00:10:00] In your article, you talked about personal net worth versus having it in the company and how that personal net worth doesn’t apply.  I don’t think I really knew that because I thought I was sort of personally signed on the jobs.  I’m curious from both of your perspectives where it is, because I thought my personal net worth was going towards that. I don’t know what my situation was and that was a long time ago. But explain that a little bit.

Wade Carpenter: [00:10:28] When you’re first starting out and trying to get bonds, if your company doesn’t have history and you don’t have a lot of  bonding history and financial history, that’s all we have to rely on is the personal net worth. And they have to get personal guarantees and all that stuff. And that’s obviously going to cost you a little more on the bond fees, but, beyond that, I mean, having that relationship where you tell them if something is going wrong, it’s a lot better to tell them you’re going to have a job fade then to get the financial statement and then have to ask. They know upfront, especially if you’ve got a good reason for it. Then communicating that will go a long way, I think.

Stephen Brown: [00:11:07] Right. And that personal net worth and having good personal credit, that helps with your first bond. And even if you don’t have a lot of personal net worth, but you have good credit, you can get some smaller bonds. But to maximize your bonding capacity is to be able to get whatever bonds you need for whatever job and whatever capacity that you can complete the job and make money. 

Remember your bond agent is working with you and your underwriter to sell jobs, especially if the job is more than two times your largest job you’ve ever bid before. So as a general rule of thumb, if it’s over twice as big as the biggest job you’ve ever done before, you’re really going to need to have all those things in place and be able to sell it to the bond underwriter to get it approved.

That’s my job and it’s your job too. The personal net worth aspect of it just doesn’t drive surety capacity, but I’ll tell you what does is when you can bump up your corporate statement by lending some paid in capital from your personal  cash- paid-in capital into your company, and then you agree to leave it there for 18 months without withdrawing it, then you get bond credit for that. And if you have a reputation of putting it into the company and taking it out immediately, well, that’s going to come back to bite you. You won’t be able to do that again and get bond credit. But that’s another tip to maximize in your mining capacity is paid- in capital into your company.

Rob Williams: [00:12:34] Those are two issues right there that I wasn’t really aware of. Not being on the bonding side, being on the contractor side, I’ve heard a lot of people talk about, oh, I need to have all this money in on June 30th, whatever their bonding date is . I’ve heard that talked about a lot, which that always seemed kind of silly to me, but I guess it proves that they have the ability to put it in there, but it’s not in there the rest of the year. And so it’s interesting for me to hear you say that about having a reputation of taking it out. 

And that job size, I didn’t realize that there’s two times or three times job size. I pretty much thought it was based on financials. It makes sense to me, but I was not aware. I know when I was doing it, when I bid some of those bigger jobs, Stephen, that were significantly bigger than the jobs that I had done, they were definitely more than two or three times the the size, but I thought it was all based on financials. I didn’t realize that you took that into account.

Stephen Brown: [00:13:36] Yeah. A lot of that job that is over two times might be a lot of materials, it might be a certain sub you’re partnering up with, that’s going to sub bond back a big chunk of that. There’s a lot of ways to sell that. But maximizing your bonding capacity is all about the comfort level at every level, the comfort level from the surety company. If you were asked, if you  put yourself in the shoes of a bond underwriter, and you were asked to do something for you, what would make you comfortable? 

We talked about the financial reporting aspects of it. Another thing is in that meeting or another time, Ask your underwriter and your bond agent to come look at a job site, something you’re proud of, introduce them to some of your key employees, making sure that relationships there, let them know what’s unique, what problems you’ve had to overcome on that job. What you’re proud of. That goes along way. And I can’t tell how many jobs have shown up as photographs on the surety company websites. They’re proud of it. They had a part to do with the building. You’re the one that built it. You did everything you made the profit, but then again, they backed you and it was a successful project. So that’s another good trick. Those meetings are worth their weight in gold.

Wade Carpenter: [00:14:56] One of the things I was going to bring up that you hadn’t really mentioned was the lines of credit . I had a situation where the contractor was going to put a hundred thousand dollars in the bank and collateralize a line of credit with that and the bank turned it down. And the reason was they weren’t going to make any money. The line of credit can go a little ways in helping that bonding capacity too. 

Stephen Brown: [00:15:15] Sure. Bank lines of credit are an extra level of comfort along with a good CPA statement. They want to know that you can get a line of credit. If you secure a line of credit with a CD or something like that, you have to make sure you let them know, I’m going to be using that line of credit and I’m going to be paying it off regularly. 

Rob Williams: [00:15:34] Okay. How is that looked at from the bonding capacity, because you have a debt on there?  Do you all have ratios of that? Like, you give them credit for 60% or does that go in as a hundred percent?

Stephen Brown: [00:15:45] Well, the SBA program gives you bond credit for the CD you use to secure the line of credit and the line of credit. They don’t differentiate. You get bonding credit based on your line of credit. That’s the SBA, most bonding companies want to know that you’ve got it in place when you need it; and there are definitely times where you need it. But then again you’re building the cost of when you’re gonna need it into the job costs as well. The cost to borrow that money.

Rob Williams: [00:16:13] As opposed to cash or working capital. Are they a one-to-one, like if you have a hundred thousand in cash versus a hundred thousand  of credit?

Stephen Brown: [00:16:21] There’s no general rule of thumb, but generally  an amount of credit, as much as you can get to push for, is something that really helps maximize your bond credit. 

Rob Williams: [00:16:31] Yeah, 

Stephen Brown: [00:16:31] Main thing is just to get one.

Rob Williams: [00:16:33] All right. So I’m glad our Contractor Success Forum has been a success today. So, introduce yourselves and tell us how they can get in touch with you. Wade?

Wade Carpenter: [00:16:44] I’m Wade Carpenter. I’m a CPA with Carpenter and Company, CPAs. And we help contractors nationwide to become permanently profitable. You can reach me at

Stephen Brown: [00:16:54] And I’m Stephen Brown with McDaniel-Whitley Bonding and Insurance. And our website is Get in touch with me there, or 901-340-8085.. My email address is And let me know if if you want a copy of that article or if there’s anything that we could do to help you.

Rob Williams: [00:17:18] And I’m Rob Williams with IronGate Entrepreneurial Support Systems, and I’m driving profits in your business. Thank you for listening today. Thanks, bye.

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