THE FIRST NUMBER YOUR SURETY READS
Current ratio equals current assets divided by current liabilities. Sureties and banks want 1.5x or higher; some want 2.0x for higher bonding capacity. For a subcontractor with $1.2M in current assets and $700K in current liabilities, the ratio is 1.71. Below 1.5x, bonding capacity gets cut, LOC renewals get tougher, and growth gets capped externally instead of internally. Building and protecting the ratio is one of the most underrated financial moves a sub can make.
You can be profitable and still get told no on bonding. Profit is what you earned. Current ratio is what you have. The surety reads both.
WHAT IT IS, EXACTLY
Current ratio = Current Assets / Current Liabilities. That’s it. Both numbers come straight off your balance sheet. Current means convertible to cash (or due to be paid) within 12 months.
Current assets typically include: cash, AR (excluding retention older than 12 months), inventory, work-in-process billing positions, prepaid expenses, short-term investments.
Current liabilities typically include: AP, accrued payroll, current portion of long-term debt, line of credit balance, sales tax payable, customer deposits, billings in excess of costs (BiE).
Plug them in. Divide. That’s your number.
$1.2M current assets ÷ $700K current liabilities = 1.71. Above 1.5x. The surety is comfortable.
THE BENCHMARKS THEY USE
| RATIO | SURETY READ | BONDING CAPACITY IMPACT |
|---|---|---|
| Below 1.0x | Critical — insolvent on paper | Bonding withdrawn or capacity cut sharply |
| 1.0x – 1.3x | Tight — one bad month from trouble | Capacity capped at current level |
| 1.3x – 1.5x | Acceptable but watched | Modest growth in capacity possible |
| 1.5x – 2.0x | Healthy — comfortable position | Standard capacity, growth supported |
| Above 2.0x | Strong — significant headroom | Aggressive capacity available |
Sureties also look at working capital in absolute dollar terms (current assets minus current liabilities), not just the ratio. A 2.0x ratio on $200K in working capital looks different than a 1.6x ratio on $1.5M. Both numbers matter. The ratio is the first read; the absolute working capital number is the second.
THE THREE WAYS SUBS MISREAD THEIR OWN RATIO
AR INCLUDES UNCOLLECTIBLE OR STALE RECEIVABLES
If a $180K AR balance includes $90K from a GC who went bankrupt, the current asset side is overstated by $90K. The surety will adjust it down. Same with retention older than 12 months — technically a long-term receivable, not current. The fix is regular AR cleanup with write-offs taken when they’re real, not held to pad the balance sheet.
BiE AND CiE TREATED WRONG
Billings in excess of costs (BiE) is a current liability — it’s revenue you billed but haven’t earned yet. Costs in excess of billings (CiE) is a current asset — work you’ve performed but haven’t billed. Most subs we look at have their WIP schedule producing one or the other inaccurately, which flows straight into the current ratio. A $300K BiE error swings the ratio significantly. WIP accuracy matters more than just for the WIP schedule itself.
LOC BALANCE BURIED IN LONG-TERM DEBT
A line of credit is current debt — due on demand or due at renewal within 12 months. Some books classify it as long-term, which makes the current ratio look better than it is. The surety will reclassify it during their review. Better to show the real number on your own statements so there are no surprises.
HOW TO ACTUALLY MOVE THE RATIO
COLLECT AR FASTER
Every $10K of AR collected and held in cash is a $10K shift toward better current ratio (cash and AR are both current, but cash counts at 100% and aged AR gets discounted by sureties). Aggressive AR collection on 30+ day invoices is the most direct lever.
RESTRUCTURE SHORT-TERM DEBT TO LONG-TERM
If you have term debt on equipment that’s sitting on the current portion line at $80K/year, that’s $80K of current liability. Some equipment financing can be restructured to longer terms or moved to an instrument the surety treats differently. Not always available, but worth exploring during refinancing windows.
FIX THE WIP SCHEDULE
If WIP is overstating BiE because percent-complete is off, the current ratio is understating reality. Cleaning up WIP — getting cost-incurred accurate, getting earned revenue calculations right — can fix the ratio without changing actual cash position. Same business, different (accurate) financials.
RETAIN PROFIT INSTEAD OF DISTRIBUTING IT
Profitable years that get fully distributed as owner draws don’t build the balance sheet. Retained earnings increase equity, equity supports working capital, working capital drives the ratio. For S-corps and LLCs especially, the temptation to distribute everything is real. Treating retained capital as a strategic investment in bonding capacity changes the math.
RUN THE RATIO QUARTERLY, NOT JUST AT YEAR-END
The surety pulls financials quarterly during your bonding renewal cycle. If the ratio is 1.7x at year-end but drops to 1.2x in Q2 because a big project mobilized, that’s information they read. Most subs don’t track the ratio between annual reviews, which means they don’t see the drop coming. Quarterly monitoring is standard CFO-level work.
NOT JUST BONDING
Lines of credit, equipment loans, and bank-backed financing all use the current ratio in their underwriting models. Banks may use different cutoffs than sureties (some accept 1.25x for LOC renewals), but the principle is the same: are you liquid enough to cover what’s due in the next 12 months. A sub with a 1.0x ratio asking for a $500K LOC increase isn’t getting it. A sub at 1.8x is.
The compounding effect across surety, bank, and equipment financing means the current ratio drives more of your capacity for growth than almost any other single metric. Profit gets you to the conversation. The current ratio determines what comes out of it.
One number. Read by every financial counterparty you have. Worth monitoring.
FREQUENTLY ASKED
