How to Increase Your Surety Bond Credit

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You got that dream job, but it needs be bonded. Can you get it bonded? Are you over your bonding capacity? Is there anything you can do to increase your bonding credit? Find out this week.

Topics we cover in this episode include:

  • Draft and interim financial statements
  • Cash, character, and capacity
  • How to get bonding credit as a new contractor
  • Bonds and personal collateral
  • Start your relationship with a bonding company before you need a bond


Join the conversation on our LinkedIn page:

Wade Carpenter, CPA, CGMA |
Stephen Brown, Bonding Expert |


[00:00:05] Wade Carpenter: You got that dream job, but it’s gotta be bonded. Can you get it bonded? Are you over your bonding capacity? Is there anything you can do to increase your bonding credit? Come on in, let’s talk about it. This is the Contractor Success Forum.

And if you’re new here, I’m Wade Carpenter with Carpenter Company CPAs. With me is my co host, Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, I am looking forward to this discussion. It is near the end of the year and it’s time to dress up your financial statements, but it can be a problem all year long.

Any initial thoughts, any other things that contractors can do to increase their bonding credit?

[00:00:39] Stephen Brown: Sure, there’s a thousand things. Not just one. There’s lots of things. All right, maybe a thousand. Maybe that’s pushing a little bit, Wade. But, you need more bonding credit. What can be done?

Draft and interim financial statements

[00:00:51] Stephen Brown: And, the first thing that I would say, we were talking about in our last podcast about dressing up your financial statement for the year end.

Remember that financial statement is going to be the number one operating tool that that bond underwriter uses to decide how much bonding credit to give you. And also an interim financial statement, if needed, that shows how it looks. And a lot of times they’re going to want to know how the year end looks, even though the CPA hadn’t finished your statement yet.

So what do you do about that?

[00:01:21] Wade Carpenter: Well, I don’t know if you want my perspective, but sometimes we have done drafts as long as we’re comfortable with the numbers. The other thing I would say on the interim financial statement, I think it’s a good point that you need some kind of interim financial statement, but the contractor is so far behind on their books that they can’t pull that stuff together or they don’t have their job costs pulled together where they can do a WIP schedule, because I know you’re going to want a WIP schedule at that point, right?

[00:01:47] Stephen Brown: Absolutely. If you can’t pull together an interim report that ties into your WIP, work in progress, or work on hand report, then you’re going to hurt your ability to get that extra bonding you need. Because you remember that bond underwriters give you a lot of credit for your backlog gross profit.

Especially if that’s good work that you’ve done before, that traditionally you’ve made money on. And we talked about the fact that, you need to be in business for three years. And you’re like, oh, wow, but I’m not in business for three years. Well, the best way to push that problem out of the window is with showing extra cash. That’s just the main way to get around that.

Cash, character, and capacity

[00:02:27] Stephen Brown: And then the second thing we talked about before is what bond underwriters look for is, on underwriting, is your cash, your character, and your capacity. So what does that mean to increasing your bond line? It means, cash, making sure that you’re showing that you’re liquid, that you’ve got cash in the bank.

Character, that you have a relationship with that bond underwriter, and you’ve shown them that you can finish these projects, and you also have the kind of open relationship where you can talk about a job coming up, and why it’s so important to you. Why does this fit you perfectly? How can you make a great gross profit margin on this one particular job? How is it a dream job? Is it a job that you just have to do to make ends meet, or is it a job that can really put you on the map? Because every contractor that’s successful has some jobs or series of jobs that put them on the map. And bond underwriters understand that.

And then finally, the capacity. Is that work something that you can do? How? Explain it. Because remember, bond underwriters are not contractors. You have to explain to them how you’re going to do the project and why it fits in. I have this project manager. We’ve done this. We’ve done a similar job here.

And also, if the location is out of your normal operating territory that’s going to raise a red flag with the bond underwriter. So what team do you have in place? Say I’m going across the state to do business, I’ve got a team of local subcontractors that I know and have relationships and so forth. These things all tie in together.

[00:04:04] Wade Carpenter: Right, well, you threw out a lot of stuff in that one little monologue there.

[00:04:08] Stephen Brown: Well, I wanted to get it out there.

[00:04:11] Wade Carpenter: Well, can I ask some points on some of the things you threw out there first?

[00:04:15] Stephen Brown: Of course.

How to get bonding credit as a new contractor

[00:04:16] Wade Carpenter: As we talked about in the last episode about dressing up financial statements, that is one of the things that, three years in business is the cardinal rule for banks even considering a line of credit.

And I know working with contractors and all businesses, the failure rate in the first three years is astronomical. So getting past three years means you got past a hurdle. But from the bonding perspective, is that a hard and fast rule? Can they get around it or do they have to do things personally? Is there no getting a bonding credit before you hit three years?

[00:04:50] Stephen Brown: Well, the first way to get bond and credit when you’re a new contractor is through credit scoring bond programs. And a lot of those are, are limited in how much bonding you can get. But if you are starting a new construction company with an experienced group of partners doing the same type of work that you’ve always done, and you and your partners are well funded, and you have some operating cash to get your company started, and you also have a good construction oriented CPA that can put together a review statement for you, that’s going to get you out of the credit scoring program. Does that make sense?

[00:05:30] Wade Carpenter: Absolutely.

[00:05:30] Stephen Brown: Okay, so there’s credit scoring and then as a contractor, you want to get out of the credit scoring program, unless you just need a bond once every blue moon.

But if bonding is vital to the growth of your company and the sales and the type of work you want to do, it’s a requirement, then you want to get out of that credit scoring as fast as possible and three years track record of CPA prepared review caliber financial statements are worth their weight in gold.

Because that statement, Wade, it’s not only showing your cash and your working capital, but it’s also showing all the projects you’ve done and how they performed. So, if you were an underwriter, wouldn’t that open doors to you?

[00:06:10] Wade Carpenter: Absolutely. Absolutely.

[00:06:12] Stephen Brown: One other thing, Wade, is that, in my job as a bond agent I don’t get a new account unless there’s a problem.

So, emergencies come up, things come up, there may just be a situation where you and the underwriter of this particular company just completely disagree on a certain project. That’s where you call someone in like me. What’s going on? What happened? What have you got? Let’s see what we can do for you.

[00:06:37] Wade Carpenter: And sometimes the underwriters, they may be seeing things that you’re not seeing, but they also may not have all the full picture that you know about the job and why it may not be as bad as they think. But, I’ve seen that too.

Were there other things that you wanted to jump into?

[00:06:53] Stephen Brown: No, that, those are the main topics. Come back to the three C’s. Cash, character, and capacity. Now, you know, the banks have four C’s. They include collateral. But for bonding companies, cash, character, and capacity, we talk about it all the time, Wade. You can’t get around the three.

You can say, well, my bonding company is not letting me do it because I don’t have enough cash in there. Well, remember when you’ve got more cash than you need for bonds. Of course they’re going to be a little bit looser on your bond line of credit.

[00:07:23] Wade Carpenter: Right.

[00:07:24] Stephen Brown: But also the capacity. Can you do the job? And then in the past, if you talked that bond underwriter and bond agent into pushing the limit and you’ve done the job and it worked out the way you anticipated, that’s your character part of it.

[00:07:39] Wade Carpenter: Let’s take these one by one, if we’re going to dive into it.

So the cash, we spent some time talking about, and it’s not necessarily having cash itself. It’s having the working capital,

[00:07:48] Stephen Brown: Mm hmm.

Bonds and personal collateral

[00:07:49] Wade Carpenter: We did talk about that in the last episode too, and we can dive more into it if we need to, but you mentioned the banks look at collateral. But the bonding companies a lot of times will want, they won’t necessarily want collateral, but they may want guarantees. So I didn’t know if you wanted to speak to that for a little bit.

[00:08:06] Stephen Brown: No, I really think that when you’re trying to increase your bond line of credit, you’re already giving personal indemnity to the bonding company. If that’s not the situation and the bonding company’s not cooperating, there’s a reason for that.

[00:08:21] Wade Carpenter: Well, can personal collateral, personal financial assets, I know the answer to this question, but what’s your take on, if they have a personal net worth, does that help their picture?

[00:08:32] Stephen Brown: The bonding companies are underwriting the corporation, not you, not your personal assets. Of course it helps if they know in the back of their mind that you can make a personal loan to that company. One of my old mentors had this thing called the cash quotient factor. And how bond underwriters should take that into account.

How much cash can you get a hold of, how fast, to help out your construction company? But the bonding companies want the construction company standing on their own feet. And as long as it’s standing on their own feet, you’ve met the criteria of the kind of bonds that you want to get, they like it when you take money out of the company. You’re supposed to do that. That’s normal.

[00:09:12] Wade Carpenter: Right.

[00:09:13] Stephen Brown: From an underwriting standpoint, it’s just can we consistently keep enough working capital in the company to support the bond program that you need right now? And so when you’re pushing how much bond credit a bonding company will give you, it’s totally tied to their perception of your ability to do the work.

And how do you sell that to them? You sell it through your year-end financial statements, meetings. Remember when you’ve performed a tough, interesting project, just take the time, to show your bonding underwriter. Do job site visits. A picture is worth a thousand words, and the comfort level that underwriter has in you when they see you’ve done a difficult job is through the roof.

Magic things happen when that kind of communication is going on.

Start your relationship with a bonding company before you need a bond

[00:10:00] Wade Carpenter: Okay, well, one of the things I think about when trying to get bond credit, whether you’re new to business or trying to extend it, we talked about keeping financial statements, but if you’re brand new in business, or you think you want to get something bonded in three years, a lot of times I will tell them, start doing a reviewed financial statement now.

Start that relationship with a bonding company day one, even though it may be a while before you actually can get a bond.

[00:10:30] Stephen Brown: Mm hmm.

[00:10:31] Wade Carpenter: What do you think about that?

[00:10:32] Stephen Brown: Right. When’s the best time to plant a tree, Wade? It’s the same analogy. Get started. Start talking. Develop relationships. Get referrals from your CPA about good bond agents in your area. Give me a ring if you need some help. That’s what I do for a living. And we work with contractors all over.

There’s a lot of good bond agents out there that can steer you in the right direction. And the best bond agents know how to move fast when you need a big bond. They say if you want to get something done, go to a busy person.

Well, that’s definitely true in bonding.

[00:11:05] Wade Carpenter: Yeah. Well, also again, I see this all the time and I know you do, and I’ve actually got a situation right now with an electrical contractor that never done more than small little bonded jobs, like all signature bonds. And he’s got in with a large general contractor. And he’s got a $3 million electrical contracting job with a city. And I tried to introduce him to you and I tried to introduce him to a couple of different people. And he has not done the first thing and it’s supposed to start around the first of the year. We got him reviewed financial statements for the first time last year, but it was late because he was very slow at getting all this stuff together. And I’m afraid he’s going to end up having problems getting this bond because he hasn’t done a thing.

[00:11:53] Stephen Brown: Yeah. You remember in that movie, The Right Stuff, did you ever see that? Chuck Yeager had that expression screwing the pooch, and that’s when they planted a test airplane into the ground. That’s what’s going on here, unfortunately. But anything’s possible. But most contractors learn after an emergency that goes the wrong way that they wish they had moved a little bit faster and been a little more forthright in getting this through.

And I think this particular electrical contractor you’re talking about is just assuming that this GC is going to waive the bond requirement. And, also this–

[00:12:30] Wade Carpenter: –the city and I don’t know that they will.

[00:12:33] Stephen Brown: Okay, well, if it’s a direct contract with the city, there’s no getting around the bond requirement.

So maybe they wish they hadn’t have gotten that job. Maybe they don’t want the job, but if you want the job and it’s going to make you a lot of money and you’re happy with it, then what’s holding you back? So my advice to that electric contractor would be get off the contract or get moving.

[00:12:54] Wade Carpenter: Get your financial statements in order and talk to a bond agent, even before you think you need it. If you ever think you may want to do bonded jobs, or a lot of times I’d see contractors come to me and they never thought about doing bonded jobs or thought they could do bonded jobs. But they’ve got this one that there’s, it’s hey, this is going to change my world. Well, it doesn’t change your world if you can’t bond it, if you have to have a bond on it.

[00:13:18] Stephen Brown: That’s right. Start talking as soon as you’re talking to that GC or that owner, that job’s coming up for bid. Immediately when you find out about it, start talking to your bond agent about it.

[00:13:30] Wade Carpenter: Well, I also, I know this is talking about bonds too, but a lot of times the bond agents are also very well versed in, things like workers comp insurance and general liability insurance for contractors. So developing that relationship with somebody like you. It, as soon as possible when you get in business, I think is a very smart move.

[00:13:50] Stephen Brown: Well, I couldn’t agree more, of course. And I just urge our listeners that you want to increase your bond line of credit. It just has to start with a discussion. Your first order of business is a discussion with the bond agent.

Then the bond agent can’t give you the right advice without the information that they need. So they’re going to send you a list of things that they need. The faster you can get good and accurate information back to them, the faster you can get good advice.

[00:14:18] Wade Carpenter: Right.

[00:14:18] Stephen Brown: Nine times out of ten, a good bond agent can tell you, if these elements are in place, I think we can do this for you. And I think we can do this for you.

It’s I’ve got a market that’s going to probably say yes. Just give me some time. Let me get, let me get on it. Let me do my, my work. Let me get going on it.

[00:14:36] Wade Carpenter: All right. Well, this has been some great information. Any wrap up thoughts or anything that somebody considering getting a bond that we haven’t said already, Stephen?

[00:14:46] Stephen Brown: Well, pump up your cash in your financial statement. Communicate like crazy with a good bond agent, and you never know what you can get done. But there’s always options. There are different bond underwriters with different appetites. And maybe your current bond agent isn’t exploring the right avenue for you.

So it’s almost like getting a second opinion from a doctor. But that’s what we do for a living and that’s how to increase your surety bond credit.

[00:15:12] Wade Carpenter: Great. I guess the only thing I would add is being proactive about it. I think we’ve said that, but if there’s nothing else I guess we’ll go ahead and wrap up.

Thank you all for listening to the Contractor Success Forum. Check out the show notes at or on the Carpenter CPA’s YouTube channel for more information., consider subscribing and follow us every week as we post a new episode, and we will look forward to seeing you on the next show.

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