Factoring While Surety Bonded… Finding Working Capital is Possible

Imagine this: your firm just landed its biggest contract; everyone is ready to get out there and begin working, you just need to secure working capital to help you cover the additional payroll and material expenses. Then you find out that a surety bond is being required by the owner. This makes it seemingly impossible to receive funding and begin the job that will grow your business. Do not fret; there is a solution to your problem! Read on…

What are Surety Bonds?

Just so we are all 100% clear, let’s start with the definition of a surety bond:

A type of surety bond used by the owners or General Contractors in construction projects to protect against an adverse event that causes disruptions, failure to complete the project due to insolvency of the contractors or subcontractors, or the job’s failure to meet contract specifications.

Being bonded refers to a construction company having obtained surety bonds, which are financial guarantees that ensure the company’s performance and fulfillment of contractual obligations.

The difficulty in finding access to working capital using factoring on bonded work depends on who is the bonded party – you or your general contractor?

Why Does Being Bonded Make it Hard to Get Factoring Funds?

While being bonded is generally seen as a positive attribute, it can sometimes make it more challenging for a construction company to obtain accounts receivable factoring. When talking to a potential factoring company as a source for cash, the factor will assume the responsibility of collecting the payments from your customers. However, there are a few reasons why bonds can make it difficult for the factoring company:

1. Collateral: Factors typically assess the creditworthiness of a company before purchasing its invoices. The surety bonds required for construction projects often tie up the company’s assets as collateral, making it difficult for the factor to access sufficient collateral to secure the factoring arrangement.
2. Liens and Claims: Construction projects may involve complex legal situations, such as mechanics’ liens. If your construction company is bonded, it means that the surety bond provider assumes responsibility for these potential liabilities. Factors may be hesitant to purchase invoices from a bonded construction company due to the increased risk associated with potential liens or claims.
3. Risk Assessment: Factors evaluate the risk associated with the invoices they purchase. If a construction company is bonded, it may indicate a higher level of complexity and potential risks in its projects. Factoring companies may consider these additional risks when assessing the creditworthiness of the construction company, leading to factoring rates or a refusal to factor the invoices altogether.

Can You Get Factoring if You Are Bonded?

Although it may be difficult, there are companies, like CapitalPlus, that focus on construction financing out there. Because their systems are specially designed around construction, they fully understand how to work with you if you are bonded. These companies will have experience in “shifting” rights and opening up the ability to supply working capital for new and larger contracts.

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Can You Get Factoring if Your General Contractor is Bonded?

If your general contractor or subcontractors are the ones that are bonded, it can be easier to receive funding. When working with a bonded GC, factoring can be simpler and even advantageous since payments are insured by the bond company. In this scenario, it works in your favor and can make it easier to receive funding.

How Factoring Complements Bonded Projects

For contractors, making payments like payroll or materials payments can be tough especially with the added requirements tied to bonds. Factoring offers a solution by quickly adding working capital without disrupting the bond agreement. This cash flow boost helps ensure projects meet deadlines and contract specifications without impacting the terms of the bond. And unlike traditional loans, factoring doesn’t add debt to your balance sheet or impact your bonding capacity, meaning it won’t interfere with future bond eligibility or project obligations.

Key Differences: Factoring for Bonded vs. Non-Bonded Projects

While factoring provides cash flow solutions for both bonded and non-bonded projects, there are a few key differences in how it applies. In bonded projects, factoring companies often advance a slightly lower percentage of the invoice value compared to non-bonded work. For example, CapitalPlus typically advances around 70% for bonded invoices (due to compliance needs) and 80% for non-bonded projects. Although we are only talking about the advance payment, the difference reflects the unique risk considerations that come with bonded work, ensuring both the contractor and the factoring partner adhere to bonding requirements.

Does Factoring Impact Bonding Capacity?

One common concern among contractors working on bonded projects is whether factoring could affect their bonding capacity. Fortunately, factoring is a simple purchase rather than additional debt like a loan. This means it typically has no impact on a contractor’s ability to secure future bonds. Factoring enables contractors to balance ongoing cash flow demands without limiting the ability to take on new projects. In fact, “leftover” factoring funds can be used as down payments on future jobs’ requirements like materials or hiring additional team members.

So, is Factoring Possible While Bonded?

Yes, factoring receivables while bonded is possible, but it can be challenging in certain situations. You will need to find a funding partner with experience navigating these issues, ideally one specializing in the construction industry. They will be your best bet for finding factoring funds when you are bonded.

If you’re a construction business—bonded or not—considering factoring to maintain cash flow and project momentum, contact CapitalPlus. We’re here to answer questions and help you explore all your options.

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