The Real Reason Sureties Require Fund Control (And Why It Matters)

Author, Josh Hill, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

When a surety company issues a bond, the main goal is simple, to make sure the job gets finished and no one loses money. Even if a company has deep experience and strong finances, that does not always mean project money will be handled the right way. Because of this, a surety may ask for fund control when there is more risk.

One major reason projects run into trouble is poor cash flow management. Contractors often work on several jobs at once and must pay for labor, materials, and everyday business expenses. Without controls, money from one job may be used on another. This can leave a project short of cash and cause delays or failure. Fund control helps prevent the comingling of funds by ensuring that  funds are only used exclusively for their designated project.

Another concern a surety wants to avoid is money being used in the wrong way, especially on private jobs where there is much less oversight than on a public project. Fund control helps by placing money into a special account, requiring proof before payments are made, and making sure work is done before money is released. This helps ensure funds go toward the right things, like workers and materials.

Sometimes there is no lender or outside party tracking how money is spent. In these cases, fund control acts like a financial checkpoint. It tracks spending, requires documentation, and adds structure. This helps everyone stay organized and reduces mistakes.

Sureties also use fund control to support higher-risk companies, such as newer contractors, companies with less cash, or businesses taking on bigger jobs. Instead of turning the work down, the surety can approve the bond with controls in place. This gives companies a chance to grow while lowering risk.

Even though fund control may seem strict, it can help the business. It keeps finances organized, helps ensure subcontractors get paid on time, reduces disputes, and can make it easier to get bonds in the future.

Fund control is not meant to make things harder. It helps projects succeed by making sure money is used the right way at the right time. In the end, it protects the surety, supports the contractor, and helps the job get done successfully.

Rancho Mesa is happy to assist you with any questions regarding your bonding needs. Please content me with your questions at jhill@ranchomesa.com or (619) 798-2819.

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.