What you should know before getting a bond

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Many newer contractors find the process of obtaining their first bond intimidating. This week we’re walking you through what you need to know to get bonds and go after the projects that will help your company grow.

Topics we cover include:

  • How your bond agent will work with you to get approved, even if your financials aren’t perfect
  • The main factors bond underwriters consider when deciding whether to approve a bond application
  • How working with a construction-specific CPA can help you get bonds
  • What can help you get approved when you’re just starting out 


Fill out the form below to instantly receive these free downloads mentioned on the show:

  • Sample Contractors Questionnaire
  • Sample Bank Reference Letter
  • Sample Personal Financial Statment
  • Sample Resume



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Find all episodes and related links at ContractorSuccessForum.com.

Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com


[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. You don’t know what you don’t know here on the Contractor Success Forum, so we’re here to help you out with that. And today we are talking about what you should know before getting a bond.

We have today with us Stephen Brown to help us with that, because he is a construction bond agent with McDaniel Whitley bonding and insurance agency. And he has over 30 years of experience, underwriting and placing bonds for you. So he can talk about what you don’t know.

[00:00:50] Stephen Brown: You don’t know what you don’t know.

[00:00:52] Rob Williams: That’s right. That’s right. And we have with us Wade Carpenter with Carpenter and Company CPAs helping contractors nationwide to become permanently profitable.

And I’m just Rob Williams here with IronGate Entrepreneurial Support systems, your profit strategist, driving profit in your businesses.

So let’s talk about it, Stephen?

[00:01:14] Stephen Brown: Just Rob Williams. That’s kind of

[00:01:17] Rob Williams: I don’t know. I’m just–

[00:01:18] Stephen Brown: Don’t diss yourself. You are the man.

[00:01:20] Rob Williams: How can I be the man when you man, you the man, baby!

[00:01:24] Stephen Brown: Okay. Alright, Wade, you’re the man. What’s up with you this morning?

[00:01:29] Wade Carpenter : Well, I’m still figuring out what I don’t know, but I’m still trying to figure out how Rob uses aviation to fly into construction projects or.

[00:01:36] Rob Williams: Yeah, I know, I mean, that’s what we’ll talk about that. Doesn’t, every contractor need a charter airline for his contracting business to–

[00:01:44] Stephen Brown: It’s just a good business decision, I think

[00:01:48] Rob Williams: Oh yeah.

[00:01:48] Stephen Brown: A plane or a helicopter or both.

[00:01:51] Rob Williams: Yeah, your bonding agent loves seeing that on the financials. I’m sure.

[00:01:55] Stephen Brown: If you got enough working capital and net worth, this is America, you can buy whatever you want. Who cares what a bonding company thinks? But you know, the topic today that you wanted to talk about was getting a bond.

What kind of impressions do you make? What do you look for to say yes? Because isn’t that the advice you need? Is for people to say yes to what you want?

[00:02:19] Rob Williams: Yes. Yes. Yes.

[00:02:22] Stephen Brown: Okay.

[00:02:23] Wade Carpenter : I remember Rob was telling us the first time he got bonded and, he had an established business and I don’t understand why the intimidation, I know a lot of times people have a problem turning over their financial statement. I didn’t know if Rob wanted to relate that story.

[00:02:40] Rob Williams: Yeah well, when I came to Stephen, I had, well let’s see, I had maybe two decades, 20 years of experience. And then I had framing crews and I owned my own truss manufacturing and lumberyard. And I’d been a home builder and land developer for a long time. So I had a lot of experience and I had financials, but I had friends that had a lot better financials. And they were big commercial contractors. So the word bonding in our talks, and what they had to go through intimidated me.

So as I was coming out of the residential world to go into the commercial world, Of contracting, I heard the millions and millions of dollars that you had to have as capital, because I guess these guys were doing the big, large bond. So I felt like a total imposter coming to you the first time. And I probably would have, if we hadn’t already been friends, I may not have made that jump into the commercial area. Because I was so intimidated by thinking I had to be some big corporate structure, something. I just didn’t know. And you got me a bond and I was like, how did that happen?

[00:03:50] Stephen Brown: Well, you know, it was nothing for you to even remotely be embarrassed about. It’s like going into a dentist and your, your teeth’s rotted out. I said, somebody might give you a hard time, but it’s generally not your fault if you’ve got something bad going on. I don’t know. But the point is is that, as a bond agent, it’s my job to get your bond approved. If it makes sense to you and it makes sense to me, we’ve got to get it approved, and that’s first and foremost. So in order to get it approved, I go to the bond underwriters, and I used to be one.

And when I was a bond underwriter, the way they trained me to think, guys, was look at the cash, character, and capacity of this contractor. Look at his cash situation. Capacity. Can they do the work? Character. Does he do what he says he’s gonna do?

Those are the things that, that that I would look for. And the first thing that paints the best picture of how you’re doing is your financial statement. And. I would be looking at a bond request and if it was smaller, you’d be a little less picky. If it was bigger, you’d be more picky in the underwriting. But, you’d look at someone who kind of had their act together and had a CPA-prepared either review or audited financial statement, and you’d open up the the booklet and give a five minute underwriting.

Just to tell you where you are, what’s your working capital, which net worth, did you make money? And do you over- and underbill a lot? And why? And then, do you have a lot of backlog gross profit or is there any?

So all that takes about five minutes, just to kind of skim through and see where you are. And in order to get to that point, you had to start somewhere. You had to put together a set of books and you had to get an accountant and you might have problems getting bonds because your accountant is not a construction-oriented CPA. I talk about it all the time. So I guess from Wade’s point of view, it’s kind of hard to toot his own horn for what he does, but it’s everything. It’s like having a carpentry job without a hammer. It, you can’t do it. You can’t do it without the financials.

And also there is a credit scoring bonds. So just like going to get your first house, you had to build up good credit. Well, you can get bonds based on credit. Only in tax returns showing that you’re making money. But it all comes down to getting the financial statements done and putting together a good submission. Making you look pretty before I take you to the dance. Wade, what do you think?

[00:06:13] Wade Carpenter : I have a lot of people that come to me and they, they don’t even know where to start, and what they have to give to you. And so I thought it’d be great if you could kind of tell us about the profile and the history and the kind of background and those kinds of things that a brand new contractor might want to have in place to bring to you for the first time.

[00:06:34] Stephen Brown: Okay. Well, the first thing for an ideal submission that I put together is a contractors questionnaire. All the companies have their own, but at McDaniel-Whitley, we have our own, which is kind of, a combination version of all the companies. So we know we’re getting the information together. Name, address, federal ID tax number, phone number, email addresses. Then name, home address of the owners, your social security number, date of birth. That’s on the first page.

And then moving down, they want to know what are the five biggest jobs you’ve completed in the past? So put them in order. And as a general rule, if you’ve completed a $250,000 job, you can get a half a million dollar bond. Two times the amount, if it makes sense, and it’s in your area of expertise.

And then the next thing, is five supplier references: names, address, and a contact person and phone number. A lot of underwriters call these people. So if you don’t have five, you need to build five up that know you and can say what? Oh yeah. Yeah, they’re a great company, we’ve done business with them for X number of years, they pay their bills on time. So that’s the next thing.

And then the next list is a list of subcontractors, if you’re a general contractor, that you’ve worked with. And if you’re a subcontractor, general contractors you worked with.

Then there’s a list of architects and engineers, and they want to know who you work with and on what jobs. And what was your gross profit on those jobs? Then they want to know who your key employees are, how long they’ve been with you, what their experience.

Then I’m going to want to know what kind of insurance you have. And that’s it. That’s a contractors questionnaire. And I can’t tell you how many times I’m just struggling to put that together and I don’t know. They say if you have to look in the yellow pages for a good attorney, it’s too late. If you come in with bad information and you don’t have those relationships established, then we got a neck against us just starting off. So that’s one way to think of it.

[00:08:32] Rob Williams: Stephen, can you put something together that we can put in the show notes to people that, cause that was a lot to take in, so

[00:08:39] Stephen Brown: I’ll put together a sample submission that would be a perfect submission. That I would consider a perfect submission, and why it would be so good. That would make any bond underwriter drool over saying, yes, I’ll do that. Yeah. We’ll go out on a limb here. Yeah, we’ll do that for you.

[00:08:57] Rob Williams: Yeah. And maybe a blank one that if somebody is thinking about it, they can start filling this out. And they may want six months to a year to start building that. that.

[00:09:06] Stephen Brown: Yeah, we’ll definitely do that for people to get started. Then the next thing I put together in a submission side of the contractors questionnaire is the last three year-end financial statements. And we’ve talked in the past, people have different fiscal year ends. April, June’s common, December 31st is common. It doesn’t matter to a bonding company, but that’s kinda how you have to set up your books. And it’s kind of a pain from insurance and everything else to not to kind of have a common date, but it seems to me like December 31st, Wade is your busiest time of the year and the worst time to have a year end. I don’t know. What do you think?

[00:09:45] Wade Carpenter : Well, I mean, December 31st is obviously the most common one, but you know, that’s one thing that you brought up that I think is critical. A lot of times, people that are trying to get a bond for the first time, if they did any financial statement, usually they don’t have a tax return or something like that. I encourage them, like, let’s just do a formal financial statement. Not just a cash basis statement, but if you actually have jobs that are in progress at the end of the year, let’s do over and under billings and give the bonding company, you know, some history that, you know, you know how to do this.

And the other thing that I don’t think you’ve mentioned, but most people ask for a personal financial statement.

[00:10:22] Stephen Brown: Right.

[00:10:23] Wade Carpenter : And I don’t know why that’s such a hard thing for people to come up with, but

[00:10:27] Stephen Brown: Well, it’s really not that hard. We have a sample personal financial statement form that bonding companies accept. It doesn’t have to be perfect, but it’s amazing how many assets you leave out of your personal financial statement that could help you get a bond. And why not just get your CPA to help you put one together? I have that happen all the time with the fiscal year end. And it’s just a nice presentation and it reasonably makes sense.

But nevertheless, three years of fiscal year end review financial statements. A review letter, we’ve talked about that. That means that Wade has verified a number of the balances on there. And the bonding company feels like, that’s something I can hang my hat on. Personal financial statement, then resumes on any keys employees, any information about the projects that you’ve completed.

Then I put that together. And then before that happens, I have to get an idea of what you need. What do you need? What do you want me to do? What kind of bonds do you need? What program do you need? I don’t know. I just need to get set up. Well, you’re right. You’re right! You need to get set up. So, so please don’t be afraid to say, here’s where I am and here’s what I want to do.

Once I know that, and then I have this great submission, a great contractors questionnaire, all this information is just popping, and then I call the underwriter. And then I say, I got something I want to talk to you about, which is absolutely magic to them. That’s what they want to hear. I got something I want to talk to you about. That means they’re going to look at an opportunity.

 And then you tell them, this is a great so-and-so contractor. This is what they do. This is what their specialty is, and this is what I need. Okay. Well, I’ll take a look at it. You already give them the five minutes verbally. The five minutes underwriting. I always push send and then call immediately because I want it to pop right up there on the computer while I can get them fired up about it.

And then the only thing I don’t know that I can’t control after I’ve sent it is when they pull your credit. They won’t let me know what it says. Underwriters say, well, well, we’ve got some collection issues and some other things and they’re like, wow, I’ve worked so hard to build up my company assets, but personally, probably because they didn’t follow a Profit First and they don’t pay themselves, don’t pay their personal bills on time and that sinks them. And they’re like, oh, come on.

So let’s talk about it, and be honest and let’s get a move on.

[00:12:57] Rob Williams: While you were saying that there were a couple of intimidation factors that I had that I kind of wrote down, like having an LLC, having a company, having three years of financials. What does somebody do that wants to start his own company? Just in the last few weeks, I’ve had two or three guys leaving an experienced business to start their- they’ve been saving up and they started their own commercial contracting. It may have been a trade and a specialty. Where, what do these guys do?

[00:13:25] Stephen Brown: I would say, go talk to Wade. The foundation of your new business is your bookkeeping ability, because it has to be in place to implement Profit First and to look at your cashflow and to manage the money you have. Before starting up a business, even if you don’t have a lot of cash, make sure you and your spouse have as good personal credit as any two human beings could be. And if it’s the worst credit in the world right now, you can change that.

[00:13:56] Rob Williams: You just said something that’s so, so if some of these guys are starting something and they have a strong personal history, they can come to you, or their bonding agent, and still talk about it. And there may still be a possibility to get started.

[00:14:10] Stephen Brown: Let’s talk.

[00:14:13] Rob Williams: Yeah. So it’s not don’t well, I was going from the intimidation factor. I probably could have gone out much earlier with my newer businesses had I known.. I had heard you had to have this, this, this, so I automatically disqualified myself before I even started. And I think we’ve had some comments in this podcast that, that let me know that, okay. This list is not a hard and fast list of things you have to have.

You don’t have to have three years of financials, you have some alternate methods though, for somebody to just start a business. Because how do you start, if you don’t— it’s a chicken or an egg thing.

[00:14:50] Stephen Brown: I think you’d start off with the credit scoring program if you don’t have three years experience. And if you only have one year of getting a CPA-prepared review financial statement from a good CPA, then you’re going to have tax returns for the previous two years. Have you been in business at least three years?

So starting off, we really want to push your experience and your capabilities. That’s huge. And then they want to see that you have good personal credit. And then they want to see that there’s potential for right more bonds with you. And you want to get them excited about that. And that kind of takes both of us working together.

[00:15:29] Wade Carpenter : To kind of piggyback off what you said, for a new contractor, one of the first questions I ask them, typically they, they worked for a big company and then they’re kicking off on their own and maybe they got some experience. Instead of saying, who’s your CPA? I say, who’s your bond agent, if you ever plan to get a bond, even if you don’t have one right now. Developing a relationship with a bond agent, even before you need a bond, if you could talk to that Stephen.

[00:15:55] Stephen Brown: That’s exactly right. Like I said, if you have to look on the yellow pages for a good attorney, it’s too late. Get your relationship with your bond agents started. It’s no big deal. And just like a dentist looks at bad teeth, we look at a lot of bad financial statements, or things that just aren’t there yet. And we talk about how to get you to the next step if you’re not there.

So you don’t know what you don’t know, number one. And number two, you got to start somewhere. You got to start, and if you’re going to start a new company, before you quit, you want to kind of start getting these things going. At least before you quit, making sure your personal credit’s good, if you need a bond.

And then it’s just amazing. The fast track bond program markets are out there that will do smaller projects. We have one now that will go up to a million dollar single job just based on your credit report. They also want to see three years of tax returns and personally, I think it’s a much more picky underwriting situation than just a, a half a million dollar or under credit scoring bond.

Anyway, that’s just an opinion I have based on trying to get them approved. And being an underwriter, guys, they train me to think like an underwriter to approve bonds and that just kind of helps me get your bonds approved. Cause I kinda know how they think. And that’s the mystery. Yeah, I’ve got contractors that are engineers and you know how engineers think. They want to know the rules. What are the rules, Brown? I don’t understand. Why, why, why if I subbed this job back, why I don’t get all my bond credit reinstated? There’s just a lot of things that don’t make sense and they really do the more you start working on it because the bigger you get, the more important that relationships are.

[00:17:43] Wade Carpenter : A lot of times when people start their own business, they go and they need workers’ comp, or they need like a fleet auto policy or whatever for their business. And they go to whoever they have their personal insurance or their homeowners insurance.

That’s a great way to talk to Stephen, you know, and a lot of times they have worker’s comp policies for a contractor that your traditional, advertising on TV insurance agency is not gonna have.

[00:18:11] Stephen Brown: That’s a fact. And here at McDaniel-Whitley, all we handle is contractors. So that’s what makes us better, I think, at what we do. We are obsessive about service and, you know, it’s intimidating to come in to talk to someone about your finances, especially when you don’t know them. And you haven’t been specifically referred by your best friend who does business with them. But I think that’s kind of silly. You want a relationship to stand on its own two feet. And a mutual relationship means that I’m getting your bonds approved. And I only get paid when your bonds are approved. So I don’t charge you anything to work with you. And so, I don’t know what kind of incentive I might want that could be a stronger type of incentive than not getting paid if you don’t get the job.

[00:19:02] Rob Williams: Yeah. I’m still hung up on the talk that the contractors have in the field and how inaccurate that is. I just, as we were talking about it and I had some guys that worked for me that had been commercial contractors before, and had had bonds and everything they told me was not right.

Most of it was wrong. Are there any knockout things that you’d say, well, if you’ve got these problems, come to talk to me? Are there any absolute requirements that you have out of all those things that we talked about? Or is just about everything, open game, and it’s a, it’s a puzzle to put together?

[00:19:39] Stephen Brown: Bankruptcy is the toughest thing to get around. There are some ways to get around it, there’s certain circumstances, but for a surety company, the fact that you filed bankruptcy terrifies them because that’s usually, I guess if you did it once you can do it again mentality that they think, well, if you’ve had a bankruptcy, then the odds are higher that you could have one while you’re working on some bonded projects for us, and then you leave us holding the bag. So that, that’s why. And a lot of these bonding companies reinsure their risk with re-insurance companies. And the reinsurance treaty says no bankruptcies. In other words, so if we approve your bond with the bankruptcy and you have a claim, Then re-insurance says we’re not going to kick in to help you pay off that claim. So why would any normal bonding company do that? So don’t get your feelings hurt. It’s just a fact.

 There’s some ways and things that you can do to work around that. But beside that, the sky’s the limit. If you have experience in your trade, and you believe that you’re good at what you do, and you believe you can manage people, and you can manage money, and you can manage your business, and that would be a challenge, and that’s exciting to you, then you should start your own company.

[00:21:04] Rob Williams: So don’t– so listen, do listen to the bonding agents and don’t always listen to your buddies in the field on what they say is the requirement. Or, or maybe listen– or the internet. Yeah.

[00:21:19] Wade Carpenter : Mean, I see people all the time, like, well, I should be an LLC because I found an article online or something like that. A lot of the things that people publish out there are not necessarily true.

[00:21:30] Stephen Brown: That’s That’s scary. And there’s companies that say fast, easy performance bonds. And next thing you know, you go in and you start filling out their application information and all they’re doing is extracting right out of you what I would need to make a submission for you, and they’re just trying to use those numbers to generate a bond for them. And if it spins out a no, it spits out a no.

And I can’t stand that. We try, we work best with our underwriters that actually make a decision. They look at it and they see that they see there’s a little hair on things, they see, well, maybe this isn’t right, but man, I really liked them. I think they’re going places. I think this is going to be a good account for us. Yeah, we’ll do it. And then once they say yes to a bond, then I’ll just shut up like a clam.

[00:22:21] Rob Williams: Yeah.

[00:22:21] Stephen Brown: That’s my job.

[00:22:23] Wade Carpenter : Well, I think this has been great. I think maybe we could expand on this on another podcast about the types of bonds and maybe some of the other SBA programs and things like that. But I think this definitely helps somebody that’s trying to get a bond for the first time. Hopefully, it’ll encourage them to go talk to somebody. Even if they don’t need one today, they may need one tomorrow.

[00:22:47] Stephen Brown: Right.

[00:22:49] Rob Williams: All right. Good. Give give Stephen a call. All right. Well that’s it. We went pretty long today, so, really interesting topics.

So we are the Contractor Success Forum. You don’t know what you don’t know so come here and find out what you don’t know.

We are Stephen Brown, your bonding agent with McDaniel Whitley bonding insurance agency.

Thank you for giving us all this wonderful, invaluable information today. And Wade Carpenter with Carpenter and Company, CPAs. And I am Rob Williams with IronGate Entrepreneurial Support Systems. Have a great day and come back to the Contractor Success Forum!

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