How Contractors Can Strengthen Working Capital and Bonding Capacity

A contractor’s cash position and working capital help sureties assess its financial strength and determine its bonding capacity.

A surety bond is a necessary fact of life for most contractors. In the hard-bid and public works markets, contractors must be able to get both bid and performance bonds to bid, win, and construct a project. It’s essentially an insurance policy — the surety takes over if a contractor fails to complete a project. Like a line of credit at a bank, the maximum amount a contractor can bond is determined by its financial health, the size of its work backlog, and its ability to do the work.

These requirements become more stringent during unpredictable times as surety companies raise the bar and ratchet down bonding credit/capacity. Where a contractor’s bond capacity might be 20 times its discounted working capital in a typical environment, that multiplier can be drastically reduced when financial markets are unstable. With so much uncertainty in today’s economy, sureties are particularly interested in a contractor’s cash position and discounted working capital.

How Can Contractors Improve Working Capital and Bonding Capacity?

A well-established company with a strong cash position will appear more attractive to a surety. Contractors can strengthen their financial position by collecting receivables promptly, reviewing debt repayment terms, evaluating options for long-term assets, and managing investments and cash payments.

Here are five steps to take:

1. Monitor Receivables and Collections

Closely  monitor and work receivables to make sure collections come in on time. Ensure your clients have adequate financing and no credit limitations, and perform due diligence on subcontractors.

2. Review Debt Repayment Terms

If you have an impending balloon payment on a large debt, consider refinancing it for a longer term. By doing this, the debt immediately drops out of current liabilities and improves working capital. That can be a particularly wise move in an unstable environment, when interest rates are typically low.

3. Evaluate Borrowing Against Assets and Selling Idle Equipment

Consider borrowing money against long-term assets over a four- or five-year term to put cash in the bank. Of course, selling idle equipment helps, too, as it eliminates a long-term asset and immediately converts it into cash.

4. Review Equity Investments

Be careful about investing in equity securities, as they can be drastically discounted during a financial crisis due to market instability. They can also greatly impact discounted working capital.

5. Manage Cash Payments

Closely monitor and restrict cash payments. If you need new work trucks or other equipment, finance them rather than pay cash to avoid impacting working capital.

Prepare for Greater Competition and Tighter Bonding Capacity

Uncertainty is nobody’s friend in the business world. While large, established contractors can adjust their strategy and bid on smaller jobs during times of uncertainty, it becomes a perfect storm for small- to medium-sized contractors competing for a smaller pool of work, even as bonding capacities get squeezed.

With the proper guidance, a contractor can maximize discounted working capital and put themselves in a stronger position to weather a financial storm. Contact your CRI advisor if you need assistance navigating the challenging business landscape. They can help you maximize discounted working capital and position your business for greater stability, even in financially turbulent times.