Secrets of Bonding 96: Bullies, Banks and Bonding Companies

Growing up I was a tall kid, one of the tallest in my class. I was taught “not to fight,” so sometimes I became a target for (shorter) tough kids who wanted to push around the big guy.

Now that we’re all grown up, I’m glad to say that’s all behind us… or is it?

Let’s look at the case of construction companies. If you are a contractor, you may feel bullied sometimes, by VENDORS who purport to serve you. One of them could be your banker.

Banking Relations for Construction Companies

Working capital is an important financial resource for contractors, especially when starting up a new project. They may have to work for forty five days or more, paying out of pocket for labor and materials before they receive their first money under the contract. Bank credit can be a perfect solution for this.

The new contract is an asset for the company, and the bank can rely on this when lending money. But what happens when the contractor brings the bank a bonded project? They will refuse to lend against that job! Their position is that the rights of the surety conflict with their own.

Bonding Relations for Construction Companies

More bullies: Now let’s look at the surety side. When applying for bonding support, the underwriters ALWAYS ask about banking relations:

  • “Do you have a working capital line?”
  • “How much of it is currently available?”
  • “How is it secured?”
  • “If you do not have a bank line we want you to apply for one. It can help you get through a problem and prevent a bond claim.”
  • “The bank line can help you finance the start of additional projects without depleting your cash position.”
  • “If you are approved by the bank, it helps assure us that you also deserve bonding credit.”

Feel bullied? You should!

The reality is that construction companies may need both bank and surety support. In order to pursue public work (municipal, state, and federal contracts), surety bonds are mandatory.

The bonding company wants you to have a bank, but the bank doesn’t want to support bonded projects. You can’t win!

July 5th, 2015 by