The Three C's of Surety Bonds: Character, Capacity, & Capital
Character, Capacity, and Capital are the three strata under which surety underwriters will evaluate a Principal, for surety credit. Credit Scores are primarily used to evaluate character: evidencing a person or entities' commitment to their current and past outstanding credit obligations.
Character:
The first and most important of the 3 C's is Character and is key to a strong relationships between you (the Principal) and your Surety company. Character is evidenced through the moral caliber of an individual and/or the entity seeing surety credit.
Character is demonstrated by:
Credit worthiness
Reputation among industry peers and project owners (obligees)
Timely payment of subcontractors and suppliers
Execution of previous contracts
Current work in progress
Character should be weighted greater than Capacity and Capital combined.
Capacity:
Simply put, Capacity shows that a company has the "oomph" and the power to get the job done. Capacity shows that you, the Principal, has the depth has the depth and breadth to take on specific or additional work.
Capacity is demonstrated by:
Skills and knowledge
Workforce
Equipment
Materials
Ability to take on additional work (WIP Analysis)
Capital:
Capital is the input needed to cash flow work. More importantly, a lack of capital is a top reason for contractor failure.
Capital is demonstrated by:
Financial statements
Cash verification
Working capital [Current assets - current liabilities]
Shows an entities ability to cash flow
Net Worth [Net of ALL assets and ALL liabilities]
Shows long run profitability and ability to finance future business operations
Working capital and net worth calculations are two common financial calculations used to estimate surety credit. They help the Underwriter analyze the short term and long term access to capital and are used in multiples to gauge or measure bond program size.
To get an analysis of your financial statements or receive a quote for surety credit, give us a squawk at 615-205-5080 or send us an email toinfo@ParrotSuretyServices.com
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