We have already begun to cover the Miller Act’s contractual obligations construction companies face when trying to bid on publicly funded projects. While this information is important for construction companies, they face another problem when trying to comply with bonding requirements: how to increase their aggregate bonding limit. Increasing this limit allows them take advantage of larger-sized contracts or carry multiple projects depending on the over over all backlog of work.
The truth of the matter is that the amount of bonding you can receive from a surety bonding company varies depending on their own policies and appetite for risk. At the same time, each bonding company will look to several factors when determining your construction company’s available bonding limit: available credit, liquid assets (cash), total assets, total liabilities, value of recent contracts and other factors.
In general, surety bonding companies are unwilling to raise bonding limits unless the contractor can’t demonstrate that they have a working capital position to sustain the backlog — meaning all current assets minus all current liabilities — in general most bonding companies start at 10% of the proposed aggregate bonding limit and work their way down depending on your company’s specific work and overall financial presentation.
Learn more about how surety bonding companies determine this calculation and how you can improve the perception of your company’s financial health by reading on.
Year-End Financial Statements Are the Key to Raising Aggregate Bonding Limits, Getting Bigger Contracts
A surety bonding company will evaluate your firm’s fiscal health by looking at your year-end financial statement. They may also consider your past three years as whole in order to gauge your long-term financial solvency.
Therefore, the key to raising your aggregate bonding limit for the coming year — or maintaining your current limit — is solid tax planning. You will want to be able to demonstrate a decent sum of cash-on-hand while minimizing the appearance of your debts.
If your first thought is: “Hey! Won’t that make our income look higher and affect our taxes?” Then, the answer is “Yes.” Companies wishing to reduce their tax burden will generally avoid over-stating their current assets or making moves that increase their perceived revenue/income right before the end of the fiscal year. However, the same company may wish to do the opposite in order to increase the healthy appearance of their accounts and total working capital. Choosing between the two accounting methods can thus involve a trade-off.
You can review your options with a knowledgeable CPA firm to ensure that you engage in the best strategy for both your short and long-term goals. In many cases, choosing the right CPA firm can assure your company both a healthy financial statement and show you the appropriate tax advantage planning strategies to lower your tax burden (or have it deferred all together).
Tips for Preparing a Year-End Financial Statement That Can Increase Aggregate Bonding Limit
- Maximize the appearance of cash-on-hand by avoiding cash disbursement for items that do not retain as an asset on the balance sheet
- Collect old receivables or be prepared to show the surety what has been collected since year-end.
- Err on the side of over billing rather than under billing
- Simplify your accounts statements by settling all intercompany transactions and consolidating or settling outstanding loans
- Reduce bank debt to as close to zero after the close of year end and be sure to have this subsequent event footnoted in the statement
- Pay for equipment and other high-cost assets through no cash, long-term finance agreements rather than all-cash or high down payment purchases
- Minimize all stockholder distributions, including ones to primary shareholders. You may need to balance this activity in order to prevent excess corporate tax obligations.
- Consider this advice extremely general; always defer decisions to an accounting consultant, and base them on your future bonding and banking goals and always consider your current financial situation
Increasing Your Aggregate Bonding Limit with the Help with Surety Bonding Services from an Expert
National Surety has extensive experience helping construction companies increase their single and aggregate bonding limits through sound accounting practices and over 25 years of in business knowledge. We have a vast amount of bonding products that will fit within your company’s current financial snapshot.
Find out how to increase your bonding limits and other critical information when you contact us today at 1-800-953-6699 or via our convenient online contact form.