Not Insurance Equity Revenue Bonded Receivables Circumventio n Example Summary Getting Started 1 The Relationship The Relationship Between Between Bonding & Finance Bonding & Finance What are the financial drivers behind bonding? Part I Explanation and Examples
http://www.Cash4Impact.com. Targeted at construction companies. Narrated presentation discusses what bonding companies want/need in their customers' financials to bond a project. [email protected], 404-642-0509
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1. The Relationship BetweenBonding & Finance What are the
financial drivers behind bonding? Part I Explanation and
Examples
2. Bonding is NOT Insurance
Purpose of bonding
Ensure that the project continues on or near schedule despite
issues with performance or payment.
Provide assurance to the owner or general contractor that your
company can and will fulfill its obligations as contracted.
If the bond is utilized, the bonding company expects full
repayment.
www.Cash4Impact.com 3. Bond Company Needs What are they?
What do bond companies need/expect?
10% + equity on the balance sheet.
In order to show this, a company MUST retain a portion of its
earnings each year.
This retention is shown in theStockholders Equitysection of the
balance sheet.
If you have not retained earnings, shore up the balance sheet
by injecting capital (paid-in-capital). Or, if you have an
outstanding Shareholders Loan, convert that loan to equity.
Check with your accountant and attorney to make sure you
document the conversion properly.
www.Cash4Impact.com 4. Bond Companies Wants
Bond companies also want:
5-10% of the revenues in a line of credit (LOC).
If you encounter a hiccup cost overruns, slow payment by the
owner or general contractor, disputed work, then you have access to
funding above and beyond your operational cash flow.
This LOC will help you complete the work as contracted, thus
reducing the risk that any use of the bond will be necessary .
www.Cash4Impact.com 5. Bonded Receivables
Banks & others willnotlend against bonded receivables.
Bonded receivables- accounts receivables (A/Rs) generated from
contracts that required bonds .
Why wont banks lend against these?
Banks place liens on A/Rs as collateral for the LOC. Must be in
1 stposition. With bonded receivables, bond company is in 1 st
.
www.Cash4Impact.com 6. How to Circumvent
How do construction companies get around this?
Most companies do not have 100% bonded contracts. The
non-bonded receivables make good collateral for an LOC.
Companies may utilize equipment, property, or other collateral
or strong personal guarantees by its management to obtain or
increase its LOC.
www.Cash4Impact.com 7. Bonding Program Example I
Company A has $12 million in annual sales generated from two
large $6 million projects.
Project 1 yields $6 million for the January June period.
Project 2 yields $6 million for the July December period.
Assuming both jobs/projects are fully bonded$6 million bond
program.
$6 million is the per project max. bonding capacity.
www.Cash4Impact.com 8. Bonding Program Example 2
Company B also makes $12 million in annual sales.
Revenue generated from small jobs with an average size of
$150,000 - $300,000.
In any month, projects are beginning and ending, with most jobs
lasting 3-4 weeks.
Average monthly revenue is $1 million.
Assuming all jobs are fully bonded$1 million bond program.
$1 million is the per project max. bonding capacity.
www.Cash4Impact.com 9. Summary
Acompleteprogram is typically denoted as per project maximum
over aggregate bonding program.
I.e., a 2 over 4 program would be as follows: per project
maximum of $2 million; aggregate bonding of $4 million.
Aggregate bonding- the maximum amount in total outstanding
bonds the company can have.
Remember, as a project is completed, the exposure decreases and
the bonding required for that project decreases.
www.Cash4Impact.com 10.
Additional Information:
Solving the CapitalEquation:
Financing Solutions for Small Businesses
Available on Amazon
Getting Started 11.
Thank You!
Contact Us Tiffany C. Wright Follow my blog, Cash for Impact:
http://www.Cash4Impact.com Tiffany C. Wright The Resourceful CEO
Toca Family Business Services