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Contractor Bonds - 4 Tips for Increasing Surety Bond Capacity - YouTube
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- Hello and welcome.
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My name is Ben Williams
with MG Surety Bonds
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and this is our show Work in Progress
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dedicated to surety bonding
and all things construction.
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Today we're gonna give
contractors four easy tips
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to help them increase their bond capacity.
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Let's get started.
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(upbeat music)
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One thing we get asked by
contractors of all sizes
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is how do we increase our bond capacity.
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Here are four quick tips.
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Number one, upgrade your
internal accounting system.
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Your internal numbers are
important for bond underwriters
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to give you bond capacity.
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These numbers should both
be accurate and timely.
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Also, they should be on a
percentage of completion basis
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which is the most accurate way
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to account for construction contracts.
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That means they should include
under and overbillings,
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accurate depreciation
numbers and job schedules
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such as a work in progress and
completed contract schedule.
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Now there are a lot of great
software systems out there
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that can accomplish this,
but a couple of quick tips.
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Number one, if you can go
to your local box store
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and buy that software,
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it's probably the wrong
one for construction.
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Number two, if it's geared
towards any other business
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other than the construction industry,
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again, it's probably the
wrong software system.
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Give us a call anytime.
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We'd be happy to give you a
couple of recommendations.
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Number two on our list
is to upgrade your CPA.
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Now we've all got a friend,
neighbor or relative
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who probably has the initials
CPA after their name.
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However that doesn't make
them a construction expert.
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Construction accounting
really is a beast of its own.
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Your bond company can identify
good construction accountants
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quickly by looking at your statement
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and if those statements
are not done by somebody
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with the right experience,
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it will hurt your ability
to bond jobs in the future.
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Another reason you wanna
hire a good construction CPA
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is often non-construction
CPAs try to justify their fee
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by saving you money on taxes.
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Now in theory this sounds good,
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but usually those actions
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are at the detriment of your bonding.
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Examples include spending
money on unnecessary equipment,
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accelerating depreciation
or even investing
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in other non-construction companies
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in order to save you on taxes.
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A better strategy if you're
really set on saving taxes
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would be to get with a construction CPA
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and get two sets of books.
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Now this is perfectly legal.
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One set of books will then be given
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to your lender and your bond company
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and the other set of
books is for tax purposes.
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The difference in these two books
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will show up on your statement
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as a deferred tax asset
or deferred tax liability.
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Now the third item on
our list may sound easy,
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but it's probably the most difficult,
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but if you wanna do bonded work,
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you're gonna need to leave money
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in the construction company.
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Now there are some bond companies
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that will look at the
personal assets of the owners,
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but the vast majority of bond companies
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want the financial strength
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to be in the construction company.
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That brings us to the fourth
and final item on our list,
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have a distribution strategy.
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Now for the purposes of this conversation,
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a distribution strategy is your plan
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for the company's profits.
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Bond underwriters don't like surprises.
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They especially don't
like it when all the money
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is distributed out of the company.
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Having a plan in place,
communicating that plan
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and living up to it
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will give them a lot of
confidence in your management
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and make getting bonds
approved much easier.
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Now if you don't have a plan today,
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I might suggest the strategy of thirds.
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Now what that means for an S corporation,
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you take a third of the
profits out to pay taxes,
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you take a third out
to pay the shareholders
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and the other third stays in the company
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to build up the balance sheet.
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Of course this strategy can be altered
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depending on how much
bond capacity you need
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and at what stage of business you're in.
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For example, a more seasoned company
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with a strong balance sheet
may be able to distribute more.
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A new company that's trying to build up
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may need to retain more.
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We hope you have enjoyed this show.
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If so, hit that subscribe button
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so you can make sure to
get all future episodes.
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Also, we want this to
be interactive for you
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so if there are shows you'd
like to see us do in the future,
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leave them in the comment section below
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and we'll do our best to accommodate.
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Of course you can reach us
anytime at www.mgsuretybonds.com.
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I'm Ben Williams.
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This is Work in Progress
and thanks for joining us.
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We'll see you next time.
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(upbeat music)
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