Contractors Need To Juice Up Working Capital in Volatile Times

A surety bond is a necessary fact of life for most contractors. In the hard-bid and public works markets, contractors must be able to get both bid and performance bonds to bid, win, and construct a project. It’s essentially an insurance policy – the surety takes over should a contractor fail to complete a project. Like a line of credit at a bank, the maximum amount a contractor can bond is determined by their financial health, the size of their work backlog, and their ability to do the work.

These requirements become more stringent during unpredictable times as surety companies raise the bar and ratchet down bonding credit/capacity. Where a contractor’s bond capacity might be 20 times their discounted working capital in a typical environment, that multiplier can be drastically reduced when financial markets are unstable. With so much uncertainty in today’s economy, sureties are particularly interested in a contractor’s cash position and discounted working capital. 

Steps a Contractor Should Take

A well-established company with a strong cash position will appear more attractive to a surety. In that regard, there are several important steps a contractor can still take to maximize their bonding capacity and remain competitive, including:

• Closely watching and “working” their receivables to ensure collections are coming in on time. Contractors should also ensure their clients have adequate financing, no limitations on credit, and do their “due diligence” on subcontractors.
• Refinance debt for longer terms. If a contractor has an impending balloon payment on a large debt, they should consider refinancing it for longer. By doing this, the debt immediately drops out of current liabilities and improves working capital. That can be a particularly wise move in an unstable environment when interest rates are typically low.
• Consider borrowing money against long-term assets over a four or five year term to put cash in the bank. Of course, selling idle equipment helps, too, as it eliminates a long-term asset and immediately converts it into cash.
• Be careful about investing in equity securities, as these can be drastically discounted during a financial crisis due to market instability, and they can greatly impact discounted working capital.
• Closely monitor and restrict cash payments. If you need new work trucks or other equipment, finance them rather than pay cash to avoid impacting working capital.

It’s a Unique Situation

Uncertainty is nobody’s friend in the business world. While large, established contractors can adjust their strategy and bid on smaller jobs during times of uncertainty, it becomes a perfect storm for small- to medium-sized contractors competing for a smaller pool of work even as bonding capacities get squeezed.

With the proper guidance, a contractor can maximize discounted working capital and put themselves in a healthier position for weathering the current financial storm. Contact your CRI advisor if you need assistance navigating the challenging business landscape. They can help you maximize discounted working capital and position yourself for greater stability, even in financially turbulent times.