One of the topics covered at the January 20th Contractor Seminar in St. Cloud was key elements to maintaining surety support. Goldleaf Surety Services’ President Jack Anderson emphasized that the key element is communication. Surety companies do not like surprises when it comes to a company’s financial picture.
Some of the key items that companies need to communicate with their surety and their surety underwriter include:
- Change in Ownership
- Surety companies need a correct indemnity agreement and it is the company owners who need to take responsibility in making sure the surety has the correct information for the indemnity agreement.
- ESOP’s may completely change the surety support unless properly structured. Always communicate this type of ownership change before it is undertaken to minimize the effect on the company’s bonding support.
- Stock Repurchases (Treasury Stock) can also destroy a company’s surety support unless properly handled.
- Change in Banking Relationship
- The surety needs to understand the reason for the change to help identify any problems early.
- Change in CPA
- Again, the surety wants to understand the reason for the change so they know if any issues exist.
- New Business Ventures
- The surety’s concern is how the new venture will impact the working capital of the construction company. In addition, with most new businesses profitability may take some time and their concern is that the construction company may be forced to provide the additional cash flow to keep the new venture going.
- Major Purchases of Equipment
- Is the equipment truly necessary?
- How does it impact the company’s cash flow?
- Is this impacting the debt to equity ratios that the surety company is comfortable with?
- Increases in Bank Debt
- What is causing the increase in the bank debt and is it truly necessary?
- Is the higher bank debt relating to cash flow issues which in tern means increased used of the company’s operating loan?
- Borrowings to Related Companies or Owners
- This can quickly have a negative impact on the surety support as these loans are rarely paid back or repaid in a timely manner.
- Many times these loans negatively impact the working capital of the construction company which is one of the key factors surety companies focus on.
- The construction company should not be the bank for related entities.
Again, the key element to maintaining good surety support is COMMUNICATION. The better the communication, the better the surety support. And good surety support hopefully translates into more revenues and profitability for your company.
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