Episode 149 | Cracking the Code: Lending on Bonded Projects

In this episode of The Mobilization Mindset, Scott Peper and Drew Aldridge break down the fundamentals of bonded work, including how contractors get bonded, why sureties matter, and what often prevents growing companies from taking advantage of bonded project opportunities.

They discuss:
• What sureties look for when evaluating a contractor
 • Why bonded projects can accelerate growth and credibility
 • How bonding capacity is tied to liquidity and working capital
 • Why traditional banks and lenders often avoid bonded receivables
 • How contractors can fund growth while pursuing bonded work

If you're considering bonded work or looking to expand your bonding program, this episode provides a practical roadmap for understanding the risks, requirements, and opportunities involved.

Learn more: https://mobilizationfunding.com/

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Transcript

SPEAKER_00 0:00

You want to make sure you're ready to do bonded work. And you're going to take on extra risk. One, you want to be paid for that risk. And two, you want to make sure that you can manage the risk. And managing the risk on a bonded job looks like I know how to perform this job. I've done this kind of work before. I know my costs. I know my capability. I know my team. I'm in the right area. You don't want to be jumping out on a bonded job for the first time and have it be the biggest job you ever took. Have it be a job you've never done before. Maybe you're maybe you do a lot of horizontal construction and now you're going to do the first bonded job and it's vertical construction. Those would be mistakes that you would make. Those would be too much risk to take. How you can win them, should you do them? What's good about them? What's bad about them? Me and Drew are going to tackle these questions with you right now. Now, if you're looking for more information or you want to come back to this, you can always find us on our YouTube channel at mobilization funding and also our website at mobilizationfunding.com. Drew, welcome on.

SPEAKER_01 1:18

What's up? I'm here. I'm here.

SPEAKER_00 1:20

All right, surties. Yeah. We're always talking about them. People love bonded jobs, people hate bonded jobs. Some people excel at bonded jobs and some people do really poorly at them.

SPEAKER_01 1:32

Okay.

SPEAKER_00 1:32

All right. We got some questions here for us, okay? Okay. Here's what the first question is Why bonded jobs are an opportunity and also added pressure.

SPEAKER_01 1:44

Yeah, I mean, I'm gonna answer a little bit of that question, but I'm actually gonna turn around back on you and ask you sort of the question in a very similar fashion, right? I mean, I think bonded jobs and your bonding capacity can be a differentiator for you in the market. The more bonding capacity you have, the more opportunity you have. We talk to contractors all the time. Um, we talk to our customers, we talk to our prospects, we read about bonded projects in the news and educate ourselves on them. Three constraints construction contractors always say number one, cash flow. This is in no particular order. Number one, cash flow, number two, bonding capacity, and number three, labor. Right. So my question back to you, Scott, is how do you how do you design? They they always talk about a bonding program. Like, how do you design a bonding program if you're an owner of a construction company? How do you get there?

SPEAKER_00 2:36

Yeah. All right. I'll answer your question first, and then I'll give you a little spin on why I think they might be tough. Okay. Or when you should try to start doing bonded jobs. So to answer your question, getting a bonding program is the second step after you get our capability of being bonded. I think you should get one job first. If a surety is going to bond you, let's back up for a quick second. What is a bond? A bond is an insurance company stating, hey, if you do this work and you are awarded this work by such uh city, state, municipality, or general contractor, prime contractor to the government or uh private and require a bond, they're gonna insure your work, the performance that you signed up for, and the that fact that if you are paid, that you will pay all of your subs, suppliers, and vendors. Now, just like every other insurance company, they're not in the game of just handing out insurance policies to anyone. So you have to qualify for them. And qualifying for a bond or qualifying for a bonding program is all about your finances, your ability to perform, your work history, how long you've done it, how well you've done it, and your capability to perform. They have to underwrite that if they give you a bond to measure your performance, that you have a track record of actually performing the work that you're doing and being awarded. Um, that takes time. They also want to see that you have records maintained well. If you know your cost, if you know your budget, if you plan and forecast, that you're actually not just planning and forecasting, but you're actually hitting those forecasts and you're measuring to it. They want to know that in advance. And then they want to also know that when you're paid, you have a system and a process for making sure that you pay the people that you owe the money to. As you all know in construction, holding on to money and leveraging the dollars so you can kind of work through it, um, whether it's a general contract or a prime or subs to their suppliers and vendors. You can't really do any of that in the bonding world. You you can to a degree, but they want to know that you're you're when you're paid, you're paying out everyone.

SPEAKER_01 4:42

And then you put in all this work, you get that first bonded job, you get a bond, then what does the surety do? What do they want you to do? They want to further transfer that risk and what do they ask you to do? Go get a letter of credit from your bank.

SPEAKER_00 4:54

Yeah. So good point. Depending on what your bonding program is or your bond capacity, it's all based off of working capital as well. Whether it's 10 times, 20 times your working capital, if you have a line of credit that's available, they can give you enhancements on that. Or you can get, like you just said, a letter of credit, which is from a bank and they can leverage that. They want to know basically that you have enough working capital to execute the job on hand. Now, why is that important? Because they know that how hard it is in construction, particularly commercial construction, to manage cash flow. So they know you need working capital to get to the point where you can perform the job. And if they're gonna guarantee your performance, they want to know you have the cash on hand, which is funny because everyone in construction, the owners, the developers, the cities, the states, and the GCs and the primes know how hard it is to get a bonding program, and they know working capital is the hardest part of it or a big part of it, but yet no one's doing anything about trying to get working capital moving faster into the project. Yeah. That's a story for another day.

SPEAKER_01 6:03

Yeah, and then like I'm a I'm a I'm a subcontractor. I want to go get forget the bonding program for a second. I'm going to get my first bond on a project. Maybe it's my second or third. I'm not at the bonding project scenario yet. Who do I go to to get one of those? I go to a I go to a surety broker, right?

SPEAKER_00 6:19

You go to a surety broker.

SPEAKER_01 6:20

Yeah.

SPEAKER_00 6:21

And surety brokers are the entry point to the bonding world for the most part. You don't go directly to the insurance company. Now, surety brokers um have a unique skill. Most of them are, they're definitely well versed in accounting and finance and construction. A lot of them are CPAs also or certified financial planners. They are part of a bigger insurance company as well. Sometimes, um, a lot of times. They are great at putting together packages and then putting you with the right market. What does that right market mean? Size of your bond that you need, um, your time in business. Are you new to the bonding world or do you have this long, huge track history? Different sureties, different insurance companies fit the markets in different places.

SPEAKER_01 7:03

And I'm I'm a subcontractor, I'm looking to go do a bonded project. What kind of questions do I ask my surety broker when I'm interviewing them to best position me? Like, how should I vet these folks?

SPEAKER_00 7:14

I think you need to let them know. Um, well, if you're trying to vet them, you want to have all of your information available because they're gonna vet you at the same time. Whether you like that or not, that's what they're gonna do. But once you get through their initial process, you want to be able to articulate to them clearly the types of projects you do and what you do well, the track record and history of the types of projects you do and you've done well, your statement of work, capability statements, what you can and can't do, what you do well, what you don't do well, show them where you've failed before, be able to tell them the stories of how you've what systems and processes you have in place. And then you're gonna want to be able to ask them questions around have you ever placed companies like mine before? Do you have any companies that you've worked with before that are just like mine and where have you placed them? What are the restraints and requirements that the insurance company is gonna look for that you're looking for to help fulfill my program?

SPEAKER_01 8:06

And if you're a growth-oriented company, ask them to tell walk me through a story how you grew a company, their bonding capacity, you know, how you uh how you capitalized on their growth to eventually get to that bonding program.

SPEAKER_00 8:18

That's right.

SPEAKER_01 8:18

All right.

SPEAKER_00 8:19

So, one other thing. Why is it added pressure? Well, if you haven't figured it out by now, these types of jobs are gonna require significant amounts of pressure, time, um, reporting, history, performance, capability. You really, before you get into a bonded job, which is definitely adding risk to you, to you personally and your business. Why? Because that insurance company is gonna make sure that you perform and they're gonna do that just like you would on a loan. They're gonna get what's called an indemnity agreement against you as the owner, your personal assets, most likely, and the entire business. So if there's a failure on a job or a loss on the job that they have to cover, they're gonna come after you through the indemnity agreement. And so that adds a lot of pressure and risk. Why is that important? You want to make sure you're ready to do bonded work. And you're gonna take on extra risk. One, you want to be paid for that risk. And two, you want to make sure that you can manage the risk. And managing the risk on a bonded job looks like I know how to perform this job, I've done this kind of work before, I know my costs, I know my capability, I know my team, I'm in the right area. You don't want to be jumping out on a bonded job for the first time and have it be the biggest job you ever took. Have it be a job you've never done before. Maybe you're maybe you do a lot of horizontal construction and now you're gonna do the first bonded job and it's vertical construction. Those would be mistakes that you would make. Those would be too much risk to take.

SPEAKER_01 9:51

Yeah, and the surety is essentially your guarantor. That the job's gonna be completed, and no guarantor is gonna offer that financial risk and that execution risk without something in return. That's right. So you want to be able to inform your guarantor to the max capacity to ensure that they're comfortable and that you can grow you can grow your uh bonding capacity. So absolutely.

SPEAKER_00 10:13

Yeah. And those are the things that are important. Yeah. That's I think that's a great question. Again, the question: why are bonded jobs an opportunity and also added pressure? And so if I were to touch on the opportunity aspect of it, look, there's a lot of work out there. Just think of all the things we just talked about. Not every construction company is qualified to do that kind of work. They're not qualified to get those kind of bonds. So there's a massive opportunity there. You may have less competition depending on your market. You may have a lot of great bonded comp bondable companies, but they're going way up market for bigger jobs, and the smaller bonded jobs may have less competition. So there's opportunity in there to be successful. It also gives you a ton of credibility if you can show up to a job or show up to a bid and you have a bonding program, you have bonding capability, you have a history and track record of that kind of work. It gives what the world is always looking for is third-party verification of your capability.

SPEAKER_01 11:08

While everybody in the entire network of that is just transferring risk. Correct. Back to you.

SPEAKER_00 11:14

Eventually, here's the best part about bonded work. As a subcontractor, the risk's still all on you. Everybody's leveraging their risk down to you one way or another. The bonding company is just doing it through their indemnity agreement. Yeah. And everyone else is doing it to the insurety, and et cetera, et cetera. Yeah.

SPEAKER_01 11:31

Rip me a question.

SPEAKER_00 11:33

All right. Why are traditional lenders typically always avoiding bonded jobs or bonded receivables?

SPEAKER_01 11:41

This is a very, very simple question. Uh, and the answer is even more simple. The bond, the surety is in first position on those receivables. But I want to, I want to kind of rephrase your question a little bit. You say the question one more time.

SPEAKER_00 11:55

Why are traditional lenders typically avoiding bonded jobs, bonded projects, or bonded receipts?

SPEAKER_01 12:00

So it's not that traditional lenders are avoiding bonded jobs. I mean, traditional lenders who lend to a uh a trades, trades contractor know that a lot of their borrowers are doing bonded jobs. But if you look back at some of the videos we've done on traditional loans, what they do is typically they will have a borrowing base that you have to submit on a monthly or on a quarterly basis. And they look at all your receivables that you have in your queue, whether that be current, one to thirty past due, and so on and so on and so on. A lender, if they do have a line to you, a line of credit to you that is based on a borrowing base, the first thing they're gonna ask you is which one of these accounts receivable line items are bonded jobs? And if you have $10 million in receivables and $3 million of them are associated with bonded jobs, they're gonna say, great, now we're starting at $7 million. They are not gonna count those bonded, unless it's a lender out there that I've never, like a traditional lender that I've never heard of before. They're not gonna count those bonded job receivables in your borrowing base.

SPEAKER_00 13:11

Right.

SPEAKER_01 13:11

But you're still doing the work. You're still accruing costs associated with materials and labor, right? You're still having to do the same things you're doing on these bonded jobs that you're doing on these non-bonded jobs, but you're not getting credit for them to grow your liquidity associated with your line of credit.

unknown 13:31

Yeah.

SPEAKER_00 13:31

And in short, the way banks look at loans is based on assets in the business.

SPEAKER_01 13:36

Yeah.

SPEAKER_00 13:37

Your accounts receivable, the money customers owe you, is your greatest asset typically in the construction world. And if you have a bonded job or a surety that has given you a bond for that accounts receivable in that project, there, as Drew said, are in first position. And what does that mean? That means that the bank doesn't have first position over that collateral. And in a banking world, collateral means I can lend on it. If I don't have access to that collateral because the bonding company is in charge of that collateral first, then I can't lend on it. That's the internal dynamics of a bank.

SPEAKER_01 14:12

And a bank's never gonna be second position to anybody on anything that they're lending against. But I will tell you, when you get paid for those bonded jobs, the bank will gladly take them as deposits. So that's that's kind of one of the things. So they're like, Yeah, we're not, we're not gonna base it on your borrowing base, but um, you know, pay our loan down to credit. You can deposit as much as you want. You can deposit as much as you want, which and I I make that kind of joke, but I mean it it makes it makes sense. You have a bonding company that's in first position, the banks just that's just not the way banks are built.

SPEAKER_00 14:42

No, it's true. I mean, we work with a bank that is happy to take all of our deposits, but is totally different ball game when it comes to like how much they'll borrow, let us borrow to make loans to our customers.

SPEAKER_01 14:55

Yeah, I mean, guys, uh we face the same challenges. You do a lot. So I mean, it's uh I mean do do as I say and as I do, because everything we teach, you know, we're talking to you guys about, we're actually having we just gotta have a conversation around that. 100%. It's easy. Yeah, I mean, it's it's very similar. Um, all right. So another question here. Um I kind of want to so so all right, so Scott, banks aren't going to leverage bonded jobs as another borrowing base.

SPEAKER_00 15:23

Yep.

SPEAKER_01 15:23

Okay. All right, so I'm a growing contractor. Let's say 50% of my business comes from non-bonded jobs. Year and a half ago, I started doing government work, local municipal work where I have to get a bond. I've been smoking my own operating cash into these jobs, kind of bootstrapping these bad boys.

SPEAKER_00 15:42

Yeah.

SPEAKER_01 15:43

But I want to grow even more because these bonded jobs are larger. Good payer, it's the government, whether that be city, state, or or federal government, might be some sort of government contract on the federal side. I need a financing partner. What I mean, the the factors, the ABLs, I mean, asset-based lenders, factoring companies, do they will they work on bonded jobs or?

SPEAKER_00 16:08

Very, very few. Mostly because they are lenders who are leveraging your receivables. And just like we talked about in the last question, they are looking at your receivables, the money your customers owe you as collateral. And they're buying that collateral. That's what factoring is doing. Or uh ABL loan is really an asset-based loan, i.e., your collateral, the money your customers owe you.

SPEAKER_01 16:32

The same concept I just outlined with the bank is the same concept, just non-bank line.

SPEAKER_00 16:36

And they're just advancing it to you. So very rarely, and um, I don't even know one particular custom, I don't know one private lender right now or factoring company that will take an entire customer of bonded jobs and lend on it.

SPEAKER_01 16:49

Okay, so how how do I grow on bonded jobs? Obviously, I'm getting through the fact that you've got like contract-based financing, which is what we do. There's other lenders that probably would do it as well. But what what does a lending relationship look like for from the viewpoint of a customer, right, on bonded jobs? How do you have to get all your ducks in a row? What does that look like?

SPEAKER_00 17:08

You got a few options. So one, you can go to your bank and you can get a line of credit or something else secured by the other assets of your business, like your equipment, or maybe you own a piece of property and you can take that cash, stick it in the bank, and use that as working capital. Okay. That's one. That's a creative way to do on your own.

SPEAKER_01 17:27

Like your property.

SPEAKER_00 17:28

Like your property. Yeah. Now, if you don't have property or other assets, then of course that's the typical scenario. Yeah. Then you have multiple other options. One, the next one is you could go to your friends and family and borrow money from them. You could go to friends and family or others and get equity, i.e., cash on the balance sheet. You could go to uh your typical certified rich guy or girl, someone might refer to those as a CRG, and ask them to guarantee your indemnity agreement to the surety. And you could do that for a fee by paying them or something like that. Yeah. Or of course, you could work with mobilization funding. You know, we do that too. And so we we don't care about bonded uh receivables or not. We are underwriting your ability to perform. And candidly, if a bonding company believes in you to give you a bond, that's only more added criteria and security for what we're looking at anyway. We're not looking to secure your collateral and assets and accounts receivable. We're looking at your ability to perform. And if we can give you the working capital that you need to execute that job, and you have a bonding program and it's gonna turn into bonded receivables, then that's just more favoritism towards our underwriting model, which is to your performance, not to your assets.

SPEAKER_01 18:45

Yeah. And just to be clear, if you do have that rent rich uncle who's gonna be slinging cash to you with no strings attached, always take that. Always take that. Never say no to that. All right. So when you look at our program, and I know we don't talk a lot about our program, but it's it's very, it's very specific to bonding, right? So I kind of want to hone in on it. How do the how how does our program completely, number one, align to the mission of the surety and the and the customer? And and B, how do we, or how does a company like us reduce the in how we do it, reduce the risks to the surety to make sure the job gets done?

SPEAKER_00 19:24

Well, look, it and Drew hits the nail on the head. What the surety cares about is they want to make sure that you can perform. We've talked about that. So how do they go about doing it?

SPEAKER_01 19:33

So do we, by the way.

SPEAKER_00 19:34

That's what we care about. And by the way, that's what you care about. That's what the general contractor or Prime cares about, and that's ultimately what the project owner cares about is getting the work done performance. That's the most important thing after everyone's ready, all said and done with everything else. That's all that people care about. Let's get this project finished, complete, built, on budget, ahead of schedule. That's the most important thing. So the sureties and everyone else cares about that the most. We do too. What sureties want to do is they want to make sure that the money that's on the project stays on the project. And they want to make sure you have enough of it to get yourself started and through the initial cash flow cycle to where the job starts to pay for itself. So well, and as you know, Drew, and and maybe now the audience will too, we work with bonding companies and their bonded principals, subcontractors to execute work. And the sureties, some of them, not all of them, but some of them, and big names, will recognize us as part of the working capital solution in a loan program. That's very unique. Okay. Why do they do that? Because we care about the performance of the job, and so do they. So if our loan dollars are going specifically to job costs, subcontract labor, direct labor, uh, material, equipment rental, all those things, that's okay because when all of those costs are going to be directly reimbursable back to the contractor in their schedule of values, which is important for the bonding company to know. And the bonding company wants those, um, they want the schedule, the dollars in the schedule of values to go towards those sub-suppliers, vendors, and labor so that everyone's paid. And so because we do that in a manner in which making sure all those people are paid in advance, we just do it through the loan dollars. They don't care that once you're paid, all those, the all those reimbursable dollars back to you come back to pay for expenses that you've already prepaid.

SPEAKER_01 21:27

Because we're getting lien releases on a on a monthly basis, we're reporting that to the surety, whether that be through the broker or the uh the surety themselves. We're providing them a schedule of values for what we've paid for. I mean, it's it's completely transparent through the process so that they see almost almost quicker than they would have seen if they were just managing it on their own.

SPEAKER_00 21:49

That's right.

SPEAKER_01 21:49

Right? So we're providing them all that information.

SPEAKER_00 21:52

And then the other thing does is it protects their indemnity or it protects their bonded principle because they they don't want it, they're not juries aren't in the business of going after the indemnity. Or the indemnity agreement, the owner of the business. So they want to make sure that they can, they want to write more bonds because they're definitely interested in collecting premium and they want to do more, they want to write more bonds, just like any business. They want more revenue than they're going to be able to do.

SPEAKER_01 22:12

They want to clip 2% to 4% off the bonds and just call it a day and be out.

SPEAKER_00 22:15

And they don't want to worry about collections. They don't want to take losses. So they want to make sure that they can get their the information out there. They can collect the premium, they can do the work, the the their bonded principal can do the work, and everybody gets paid and paid off. And we help do that through the working capital solution.

SPEAKER_01 22:32

Yeah. And how, how, like more on a more general sense, how can in hand as a subcontractor, how can enhancing your liquidity position, or to put it another way, let's just put it in this planner, increasing the amount of cash that you have available, right? Increase your ability A to get bonded, but also increase your capacity to get bonded.

SPEAKER_00 22:54

Because they use a formula for working capital. It's typically 20 times your available liquidity, which would mean could come in cash in your account. Cash plus cash plus your availability on your lines of credit or other debt.

SPEAKER_01 23:08

Sure.

SPEAKER_00 23:09

Or it could come from uh any type of liquidity or or liquid assets that you have, maybe even equity in a piece of property or or equipment or assets on your balance sheet. And so that's what they want to see. And there's a formula they'll use. You can't just put up one piece of property, for example, you have to have some cash, some of it has to be liquid, but that is what enhances the overall bonding program. Yes. Typically a formula, like 20 times the ever the available amount.

SPEAKER_01 23:35

And being intentional in how you're growing your company, how you're retaining cash in your business will open up options for you to have more financing solutions, whether that be bank line of credit, non-bank line of credit, those options continue to compound, which then will compound your bonding capacity.

SPEAKER_00 23:54

That's right. Yeah. And so look, if you're if you're running a construction company as a lifestyle business, meaning I want to reduce my taxable income down to zero as much as I possibly can and run a very lean, break-even type income statement, it's going to be really hard for you to get bonded because just like any type of lending, you've got to show that you can make money, you've got to show that you have positive cash flow.

SPEAKER_01 24:16

That guy's probably living the dream, though.

SPEAKER_00 24:18

He's living the job. He's just not going to bonded jobs.

SPEAKER_01 24:21

Yeah, he's just not going to get bonded jobs.

SPEAKER_00 24:23

But and so you want to make sure that um it's it and there's nothing wrong with doing it either way. You just want to make sure that if you want to have a bond, if you want to go after bonded work because it's so available and there's a great opportunity in your market, the cities puts out a huge bond for redoing an airport, and you you just you're just gonna have to realize that you're not gonna be able to do that without some type of solution. So those are the kind of things that you want to be thinking about and why liquidity, why availability can help you do that. All right, everybody. I hope that was a good episode. I hope you got some information on bonding. Uh Drew and I did our absolute best to give you a clear, concise picture, answer the questions. Again, please submit your questions at marketing at mobilizationfunding.com. Submit those questions, we'll answer them. In the meantime, if you like this video, please share it. Subscribe to our YouTube channel, find us on LinkedIn, give us a like, give us a share. And until next time, have a great week and may God bless you.