| Need a Bond?
By
Dan Walsh After posting disastrous results since 2000, the surety
industry is finally starting to experience a rebound of sorts. 2004, however,
is shaping up to be another disappointing year.
|
Through the 90s, bonding companies wrote business in an effort to increase
their respective market share, resulting in looser underwriting standards. With
the tragedy of 9/11, and other nationally scrutinized events such as Enron, most
companies in the surety field experienced major losses through, to a great extent,
project cancellations and postponements. Some of the hardest struck were Kemper,
The Fireman's Fund and even the St. Paul's, who eventually merged with The Travelers
Indemnity Company.
The last few years have been a period of 're-tooling,'
and it appears that 2005 may find the industry returning to some semblance of
overall stability. There has been a drastic reduction in the number of players
in the bond arena and the remaining bond companies are taking a "back to
basics" approach to underwriting. With the current situation in mind, a well-presented
account submission can still receive a favorable nod.
In most cases, the
fundamentals of obtaining a bond remain the same, and this checklist may help
put you ahead of the game:
Provide financial statements prepared on a
percentage of completion basis at the contractor's year-end. This gives the bonding
company the best idea as to where the contractor is profit-wise. These statements
need to be provided by a Certified Public Accountant well versed in construction
accounting. A straightforward question and answer interview with a prospective
CPA firm, along with a few reliable references, should help in selection the correct
accountant.
Establish a banking relationship. Bond companies like to
know that in the event of a cash flow crunch, money is available to cover short-term
obligations. This also benefits the contractor's decision making in the event
of tight monetary situations. But beware, excessive debt is never a plus on financial
statements.
Work with an agent who knows the do's and dont's of bonding
- one who is knowledgeable of the surety landscape. Remember: There is no one
bonding company for all contractors. By knowing a bond company's likes and dislikes,
as well as their strengths and preferences, a knowledgeable agency can find the
"best fit" for a particular contractor. >>
Don't ask
for the moon! Bond companies like to see gradual growth in job size and overall
backlog.
Pay some income taxes! This may sound odd, but by keeping profits
in the company, it will allow the bond company to expand your line of bonding
credit from year to year.
Be prepared to offer your personal guarantee
for bond credit received. While this gives the bond company the right to certain
personal assets in the event of a default, it more importantly tells them that
you believe in your company.
Be open minded to suggestions from 'outsiders,'
such as your accountant, bonding agent and the bond company. Working together
will get you where you want to be, sooner than later. The business of bonds
has gone back to its stringent roots, and the underwriting process is now more
particular in job size and scope. Hopefully this checklist has reinforced the
fundamentals necessary for contractors needing bond credit and increase the likelihood
of obtaining it. Dan Walsh is an producer with the Minard-Ames Insurance
Group. The agency specializes in bonds and insurance for the construction industry.
To reach Dan for more details, call 602-393-3438.
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