Do I Need to Increase My Bank Line of Credit?

Nov 5, 2021

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This put up is a part of a sequence sponsored by Previous Republic Surety.

As an impartial agent with development shoppers who want each insurance coverage and surety bonds, you already know {that a} surety firm wants you as a associate within the three-way relationship with the contractor. At a while, the surety might request that one among your development shoppers enhance their financial institution line of credit score. You may reassure the contractor that establishing a line of credit score earlier than it’s wanted supplies safety for each the contractor’s enterprise and the surety firm. Right here’s data you should utilize and share about development financials, particularly in the course of the ongoing development increase.

You’re bidding on a brand new venture, and the surety firm says you want to enhance your financial institution line of credit score. Why, it’s possible you’ll ask, do I would like a lot credit score after I’ve by no means used it earlier than?

It’s an excellent query, one which’s greatest answered by contemplating the dangerous nature of development and the necessity for backup sources of capital when money circulation is tight. Sureties need their contractors to have a cushion of safety if an proprietor is sluggish in paying or there may be another monetary setback.

That’s why a surety will use a components of 5% to 10% of bond capability as a think about figuring out an organization’s working capital wants and the dimensions of its line of credit score. A normal contractor with little or no payroll or gear bills ought to have about 5% of its bond capability in working capital. If it has a $20 million bond program, it will want $1 million in working capital. Firms with giant payrolls and/or a fleet of automobiles might have 10% in working capital.

The identical components is used to calculate the dimensions of your line of credit score. A $20 million contractor would wish to have about $1 million to $2 million in financial institution credit score. In case your working capital has been stretched, the surety might ask for a better line of credit score.

The priority is {that a} contractor might exhaust its working capital and haven’t any different however to take out a short-term mortgage. Keep in mind, working capital is present belongings minus present liabilities, which incorporates money, receivables and underbilling. For those who’re ready on a giant receivable or must buy materials up entrance, your working capital will not be sufficient to maintain you. That’s the place a line of credit score is available in.

My recommendation is to get a line of credit score sooner reasonably than later. Like an insurance coverage coverage, it’s greatest to purchase it if you don’t want it. As a result of if you do want it, it’s possible you’ll not be capable to get it. If you need to ask for a mortgage to maintain your enterprise afloat, it’s possible you’ll discover the financial institution isn’t prepared to lend. Or the phrases and charges are so much increased than in case you had a longtime line of credit score.

Listed here are another issues when securing credit score:

  • Work with a construction-focused financial institution, one which understands your enterprise and the cycles you undergo. You don’t desire a financial institution that may name your line of credit score if you want it most. Ask your agent, surety firm or CPA for the names of banks specializing in development.
  • Perceive that as your organization grows, your line of credit score may also must develop. You’ll need to enhance your line of credit score, too, in case you land a bigger-than-normal venture.
  • At all times be conscious of your cash-flow wants and the time it takes to receives a commission by an proprietor or prime contractor. Public entities sometimes pay extra promptly than non-public house owners. You might want to regulate your line of credit score upwards in case you foresee large bills or uncertainty in receivables.

If your organization is in fine condition and you’ve got loads of working capital, it’s possible you’ll not want to make use of your line of credit score. Nevertheless it’s there for you if you want it. Don’t be afraid to faucet it. You’ll be glad your surety firm requested that you’ve a financial institution line in place as a type of monetary safety.

You probably have questions on something relating to surety, attain out to an Previous Republic Surety department close to you.

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