How Do Surety Companies Evaluate a Contractor’s Working Capital?
Brent Headley of Anderson & Catania considers working capital to be one of the most important financial considerations in determining a contractor’s bonding program.
How Much Working Capital is Needed to Support a Bonding Program?
Working capital is the balance between a contracting company’s current assets minus its current liabilities.
“Typically speaking, your standard surety market will want to see a working capital on average of approximately 10% of the surety program needed for the contractor,” says Brent.
Certain Assets Excluded
In the traditional surety marketplace, Brent says, certain assets will be excluded from working capital
“Those include prepaid assets, accounts receivable items that extend past 90 days, and certainly 120 days,” he says. “Receivable balances from affiliated companies or a stockholder of the company are also excluded.”
What if I have Deficit Working Capital?
You can still obtain a bond if you present deficit working capital.
“Certain industries require less work in capital than others,” Brent explains. “For example, a site contractor who is equipment-intensive is going to be underwritten differently than that of a mechanical contractor who is more labor-intensive.”
Working capital is a calculation the underwriter will make.
They take your balance sheet; they look at your current assets less your current liabilities.
I consider it to be "fast cash."
This is how much cash you can get in quickly to finance new projects, complete old projects.
Working capital is perhaps the most important financial consideration and a contractor will receive a program based on what the working capital level is.
For example, $200,000 of working capital may give you $2,000,000 in cost complete program.
Certainly, it makes a difference the type of industry that you’re in.