How to Get the Lowest Construction Bond Rates: Four Key Tips
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#1: Improve Working Capital
Improving your working capital is crucial when it comes to making underwriters comfortable enough to offer discounted surety bond costs. Your working capital is a calculation of your current assets minus your current liabilities, and it gives surety companies a snapshot of your liquidity and ability to pay bills. The underwriter will not count any past due accounts receivables (generally over one year) toward your working capital, so you need to make sure to collect on old receivables.
You can also improve your working capital without increasing your tax liability. Refinancing short term loans like a bank line of credit into a long term liability will instantly boost your working capital. As mentioned above, the surety company is only going to count your current assets and current liabilities, not taking into consideration your past due accounts receivables, which can hurt you. However, it will help you to turn any short term debt obligation into a long one. You can learn how surety bond rates work in general, and specifically how performance bond rates work.
#2: Limit Company Loans
Another useful tip is to limit your company loans to officers and employees. These loans show as assets on your balance sheet, but surety companies will discount them from your working capital. If your company's cash balance is ever low, you don't want to be relying on these loans as your fallback plan.
#3: Leave Equity in Your Company
You also need to ensure that you leave some equity in your company each year. Although you may want to avoid doing this for tax reasons, what is best for your bond needs is not always tax advantageous. Surety companies want to see a minimum amount of equity to remain within your company based on your bond limits, and adding to that equity position year after year is always best (even if it is small growth).
#4: Work with the Right CPA
Last but not least, you need to make sure that you work with a CPA well versed in the construction industry. If your CPA isn’t familiar with your industry, it could cost you greatly in taxes and in bond limitations. There are a lot of other tricks to improve your position, but actions such as recouping depreciation, selling corporate stock, and making personal loans to your company are all strategies that should be discussed on a case by case basis. You can also take a look at the most frequent surety bond related questions here. Keep in mind, it's crucial that you work with an expert in the surety industry. Learn more about how to ensure you choose the proper bond company. If you would like to learn more about what surety bonds are and how they work, you can read our detailed guide here.