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At some point in a construction business’ lifecycle, the need for credit is inevitable, be it a simple equipment purchase, a line of credit to support cash flow needs, or a loan to purchase and develop the company’s headquarters.

But when do business owners know its time, and how do they know their making the right decision for the company’s overall financial health and growth needs?

Just like in the article, Building Bonding Capacity from a CPA’s Perspective, while banking and bonding are similar, they aren’t looking at the same ratios. However, a good commercial banker and surety bond agent knows the balance between good/bad debt, and when to use debt to your advantage.

Below are some common questions from contractors surrounding their financials and building their bonding/banking capacity.

Q: When should I get a line of credit?

A: There’s a saying that it’s easier to get money when you don’t need it and harder when you do. While it may be over said, it is still highly recommended that business owners get to know their banker as soon as possible, even if they don’t have a credit need immediately. The relationship can start with a simple business checking account. This “character” aspect will go a long way in developing a working relationship with a banker.

Q: What do bankers look for to support a loan?

A: Much like the surety business, bankers look at the five Cs of credit to determine the risk of an applicant. The five Cs are as follows: character, capacity or cash flow, capital, conditions and collateral.

  • Character: Character relates to the trustworthiness of the applicant. To determine whether the applicant is low risk based on character, lenders look at the following: work experience, references, past interactions with bank and credit history.
  • Capacity or Cash Flow: this refers to the borrower’s ability to pay back the borrowed money. When measuring an applicant’s capacity, lenders look at the following: business debt, cash flow statements and repayment of previous loans
  • Capital: Capital relates to the amount of money the owner has invested or reinvested into the business.
  • Conditions: Conditions refer to the state of the business: Is it thriving or falling? How will the money be used? What are the current economic conditions?
  • Collateral: Collateral is the last of the five Cs and refers to assets used the secured the loan.
Q: I go to a bank and tell them I need a loan. They ask me how much does the loan need to be for, but I don’t want to give them a high number and get declined? What’s a good starting point for building a banking relationship?

A: Starting the relationship with the bank early in the process will help when the need for credit arises. Dialogue between the borrower and the bank should always be two sided and healthy. A consultative relationship with a banker should never result in a declination but rather a discussion on what makes sense at the time in the borrower’s growth cycle.

Q: What are some similarities between bonding and banking underwriting?

A: The background work done between bonding and bank underwriting to make a decision is extremely similar. Both look at character, capacity and capital to base their underwriting decisions.

Q: What are the main differences between bonding and banking underwriting?

A: Generally speaking, banks are usually looking at historical and future cash flow from projects to support a loan, line of credit, etc. So, the more projects/opportunities available, the better the chances are for obtaining a loan. Bond companies are looking at primarily liquidity/working capital to see if business owners have enough money to handle the work that they’ve taken on, which can be tricky if they are perceived to have too much work on hand. Finding the balance to support growth needs is the important, and partnering with the right banker and bonding expert is key.

Q: I want to buy a piece of land and build an office on it, but my bond company has cautioned me against it. What should I do?

A: A good construction banker would want to understand the concerns, which aren’t always limited to the bonding company. Environmental issues, zoning, title and even the local permitting process are all factors to consider. The banker should also encourage a conversation between the borrower, banker, bonding company and even the CPA. This will allow all to fully understand what is taking place and come up with a solution that doesn’t affect their bonding or taxes.

Q: What are some of the key ratios when underwriting a new deal?

A: When looking at new requests, whether it’s a working capital line of credit, equipment purchases or real estate, bankers will typically start by looking at the income statement and statement of cash flows. Cash flow is how bankers view a company’s ability to repay the debt. However, despite net income/top line revenue being an important factor in a business, the balance sheet is an equally important document to review as well. Bankers want to measure how a company is leveraged (total debt/net worth), working capital (current assets less current liabilities) and overall net worth.

Q: How do I know I’m with a good construction banker?

A: Start by asking the CPA or bonding agent for banker referrals. These wheel “spokes” typically stick and work together. Don’t be afraid to ask the banker for references or number of years of experience working in the industry. Also, don’t be afraid to ask questions about the bank: how many years has the bank operational? What is the asset size of the bank? What is the bank’s legal lending limit?


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