Maintaining Strong Banking Relationships Supports Surety Bonding Capacity
Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.
Having a good relationship with your bank can pay dividends for your business when obtaining bonds from your surety. Managing that line of credit appropriately can be a resource of available working capital which surety carriers likes to see, but when it is not utilized as expected by your bank, it could become a substantial detriment to your operations and ability to secure bonds.
Many established businesses are well versed in what their bank expects from them and what they need to provide in order to keep their line of credit in place, which surety companies like to see. However, many smaller companies who have been in business only a handful of years have not necessarily thought about what they need to do to keep their line of credit in good standing and renewable for the foreseeable future.
Not keeping a line of credit in good standing often happens when banks are focused upstream on middle market companies where their seasoned bankers are dedicated to that space. Newer companies or smaller revenue businesses (i.e., $10MM or less) are often serviced by less experienced bankers that may not coach their clients on bank expectations as outlined in their loan documents to keep that line of credit in good standing.
A common pitfall I have noticed among less experienced bankers in my previous 18-year career as a commercial loan officer was that smaller businesses often did not understand that their revolving line of credit needs to actually, revolve. The line is designed to support short term working capital but when your business is in growth mode, that will deplete working capital and often the line of credit gets utilized to help alleviate cash constraints.
The problem, the line of credit gets maxed out and it stays there becoming, permanent working capital. If this occurs, when the line of credit comes up for renewal, banks will typically look at two solutions; the first is to term out balance on the line of credit over a 3 or 4-year period creating a hefty P&I payment to retire the debt in full; or, if the company is lacking collateral and/or cash flow, they may decide to turn the client over to their special assets division where they will work out a less favorable repayment plan possibly looking at the assets of the business owner(s) for repayment.
No one wants to find themselves in a situation where they need to worry about their ability to obtain bonds from their surety. That is why it is important to have a dedicated banker who understands your business and proactively communicates bank expectations so that as a business owner, you can renew that line of credit at each maturity date. This keeps the surety happy and it will keep you, as a business owner, focused on your business and not a potential workout with your bank.
If you are a business owner who feels they could benefit from a good relationship banker or has questions about how to build your bonding program, I can be reached at jhill@ranchomesa.com or (619) 798-2819.