Communication is key to any relationship and your surety relationship is no different. A surety is often presented a financial statement with transactions that affect your surety program. Before acting on a surety, some issues that should be discussed with your surety representative are:
- Buy Outs or Purchases of an Affiliate – The way these transactions are set up have an impact on the working capital and equity of your firm. It is important to have them structured as to keep your bond program in place so that the company can continue to make the money needed to cover their obligations. It is in the best interest of the buyer and seller to keep a bond program in place as it benefits both to have the needed cash flow.
- Shareholder and Employees loans – Using your company as a “bank” for personal acquisitions or needs impacts your liquidity and in turn you bond program. Even a short term loan can turn into a long term loan depending on the purpose or intent with the money you borrow. Before taking that loan you should discuss the impact it will have on your bond program and if there is a better option.
- Cash vs Financing – There is always that tempting piece of equipment out there. Remember if you pay cash you loss and equal amount of working capital per dollar. If you pay cash for a $100,000 piece of equipment you loss $100,000 of working capital. If you finance the $100,000 piece of equipment you only loss the current portion of the loan per year from working capital. Keeping cash in the company is critical to a bond program.
Often a call to your CPA, surety agent or banker before making any financial decisions can avoid an unpleasant surprise of lost capacity from either your bond program or even the total loss of your bond program. In the end, it is your business and your company to run, but being informed is always the best way to proceed. For more surety information, email our surety adviser, Dina Marinaro.