Secrets of Bonding #3: How Taxes Affect Bonding

There are many factors that contribute to the underwriting decisions on bonds.  The contractor’s history is considered along with credit and financial analysis, estimating, project management, equipment – a variety of elements.

For many contractors the process of seeking surety bonds is mysterious and frustrating.  Not having them can prevent the company from graduating to larger projects and greater financial success. Seminar attendees often ask us for the silver bullet.  “What must I do to get bonded?” So now we reveal what, for many, will be the key to qualifying for bid and performance bonds:

Pay More Taxes!

Sound crazy?  Often company managers struggle to manage (reduce) tax payments.  They feel a low bill (or no tax bill at all) is proof of a successful financial strategy.  So why can paying more taxes help the company qualify for bonds?

Surety underwriters intend to write bonds for successful firms that are likely to succeed on their bonded contracts.  What better sign of success than to have made a profit in the prior year?  Profits prove the vitality of the company.  They show that company management acquired enough work, with a sufficient margin and controlled expenses, resulting in a net profit.  The point is – you only have taxes if the year was successful and the company made money.  The profits strengthen the foundation of the company assuring continued stockholder and creditor support.  Profits and growth are all elements that, when combined with other relevant factors, lead to confidence on the part of the underwriters.  That’s when bonds get issued!

Summary:

Paying taxes is an important part of bonding not because the taxes are beneficial; but because the tax payment is indicative of good record keeping, profitability, cash flow and growth all of which are good for the company and the surety that supports it.

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