The Role of Working Capital in Surety Bond Approval

Understanding the Impact of Working Capital on Surety Bond Approval: Key Factors and Insights from Surety CFO

Understanding Working Capital

When contractors apply for surety bonds, underwriters are not only reviewing revenue or profitability—they are looking at financial stability. The most important indicator of that stability is working capital, which measures your company’s short-term ability to pay bills, fund projects, and absorb unexpected delays or costs.

Working capital represents the difference between current assets and current liabilities. It shows whether your business has enough liquid resources to meet obligations as they come due. In construction, where cash flow cycles can stretch across months, maintaining strong working capital is a key sign of operational health and management discipline.

Why It Matters for Surety Bond Approval

Surety companies are essentially extending credit. They guarantee that your company will complete a project and pay its bills. To assess that risk, underwriters examine your balance sheet to determine if you have enough working capital to handle multiple projects simultaneously.

A healthy working capital ratio tells the surety:

• You can fund ongoing projects without relying on borrowed money.

  
  

• You have the liquidity to handle unexpected costs or payment delays.

  
  

• You are less likely to experience cash-flow crises that can lead to claims.

As a general rule of thumb, sureties may allow a contractor to bond 10 times the amount of adjusted working capital, though this varies by the size, type, and track record of your company.

How Sureties Adjust Working Capital

Not all assets are created equal in the eyes of an underwriter. Sureties often “adjust” your working capital to reflect true liquidity.

They will typically include:

• Cash and cash equivalents

  
  

• Receivables under 90 days

  
  

• Underbillings supported by contract documentation

  
  

• They will typically exclude or discount:

  
  

• Inventory and prepaid expenses

  
  

• Receivables over 90 days

  
  

• Related-party or shareholder loans

This adjusted number gives the surety a clearer picture of how much usable capital your company has available for operations.

How to Strengthen Your Working Capital

Building and maintaining strong working capital is not about quick fixes—it requires consistent financial discipline. Here are key strategies to improve your position before applying for a bond:

• Invoice Promptly and Follow Up Aggressively

• The longer receivables sit, the less they are worth to both you and your surety. Establish a firm collection process.

• Manage Payables Strategically

• Pay vendors on time, but avoid early payments that create unnecessary cash drain.

• Control Job Costs and Prevent Overruns

• Accurate job costing and WIP tracking help identify cash issues before they escalate.

• Build Retained Earnings

• Limit owner draws and retain profits to grow your equity base.

• Reduce Short-Term Debt

• High credit card balances or short-term loans reduce working capital directly.

• Perform Monthly Financial Reviews

• Use a month-end close checklist to reconcile accounts, verify billings, and track cash flow.

For Example

A commercial contractor with $600,000 in adjusted working capital could typically qualify for a single bond up to $6 million or a bonding program up to $12 million, depending on other financial factors. If that same contractor draws $200,000 in distributions, the bond line could drop to $4 million—illustrating how closely working capital drives bonding capacity.

The Bottom Line

Working capital is more than a financial metric—it is the surety’s window into your company’s health, discipline, and reliability. Strengthening working capital builds trust with underwriters, expands your bonding capacity, and creates the flexibility to grow without overextending cash flow.

If you are planning to increase your bond line or qualify for larger projects, start by improving the quality of your financial statements and tightening control of your current assets and liabilities.

Ready to Strengthen Your Bonding Capacity?

At Surety CFO™, we specialize in helping contractors build financial systems that support stronger bonding programs. From bookkeeping and job costing to WIP schedules and bond-readiness checklists, we provide the tools and guidance that underwriters trust.

📘 Download our Free Bond Readiness Checklist

to assess your financial position, or

📞 Schedule a free consultation to review your working capital strategy with a Surety CFO™ advisor.