Bonding is a concept many of us are unfamiliar with. In this article, we will focus on how bonding affects financing. It is important to understand that bonding is not a type of insurance. The purpose of bonding is to guarantee projects are completed on time or as near to schedule as possible regardless of payment or performance. What the bond does is reassure the owner or general contractor that the company they hire can and will complete the obligation as stated in the contract. If the bond is in fact utilized, for whatever reason, the bonding company is guaranteed re-payment in the amount utilized.
In order for bonds to be obtained there are several requirements that need to be met. One such prerequisite is equity of ten percent or higher. There are several ways this can be accomplished. A company can prove that they have retained ten percent or more in earnings this year within the Stockholders Equity section on their balance sheet. If this has not occurred or cannot be shown due to previous losses or large shareholder distributions a company can inject their balance sheet with equity capital. This will show on your balance sheet in the Contributed Capital section. Check with your accountant and attorney to ensure that this is documented properly and that conversions are done properly.
Another condition that bond companies can ask to see is five to ten percent revenue in a line of credit. This is in place to ensure that if issues arise such as cost overruns, slow payment by the general contractor or owner or disputes on work performed. The surety company can be confident that you there are available funds above the operational cash flow. The line of credit will allow work to continue as stated within the contract which reduces the chance that any use of the bond is necessary.
A line of credit against bonded receivables will never be provided by a bank or other type of financial institution. Bond receivables are funds received from contracts that require bonds. A bank places a lien on a company’s funds, receivables, as collateral in the event of default. Simply a lien can’t be placed on funds that are coming in from current contracts that require bonds. Companies work around this by not having one hundred percent bonded contracts. These non-bonded funds offer security. Companies also use equipment, property or other types of collateral.
Construction bonding as well as bonding in general is needed to reduce the risks associated with projects. Bonding affects financing and helps to ensure projects keep on pace no matter what situations arise with performance or payment.
Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs. Find out more information at http://www.bondingspecialist.com.