Derived from NASBP’s Answers to 51 Questions Small Contractors Ask About Bonding
Like bank credit, bonding is mainly dependent on strong financials and adequate liquidity for a contractor to take on construction projects. Bonding capacity is the maximum amount of surety credit a surety will provide a contractor and mainly determined by a contractor’s financial information. A surety will generally state your bonding capacity as the largest single job they would be willing to issue, and the maximum amount of contract backlog a contractor can hold, based on the surety’s underwriting.
Providing a surety with financial information on a timely basis will show organization, and commitment and providing past job experiences and references will give the surety assurance that any problems that could arise during the normal business environment will be dealt with immediately. This will also help create a successful track record for the same types of projects, experienced personnel and subcontractors.
To increase your bonding capacity, the surety will have to see your growth overtime. By providing financial information in a timely and periodic matter, you are demonstrating to the surety how project earnings are positively impacting your balance sheet, working capital and net worth. The higher the working capital and net worth, the higher the bonding capacity will be.
Surety is a credit relationship. Similar to a bank line of credit, in order to increase your limit, you must prove you are credit-worthy and are able to pay losses.
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