Being a contractor in Tennessee can be incredibly rewarding. You get to work on a variety of jobs with a wide range of clients. No two days are ever the same, and it’s great to be able to look back on a completed project and say with pride, “I did that!”
But what do you do when you outgrow the size of the projects you’re able to work on? What happens when you reach the top of your monetary limit? In this post, we’ll show you a couple of options that can let you take on bigger projects…even if it seems like your business is too small.
What is Monetary Limit?
As a contractor in the State of Tennessee, according to the Board for Licensing Contractors, your monetary limit is “the total dollar amount per each individual contract or project” that you are legally allowed to bid on.
Monetary limits are based on “10 times the lesser” of both working capital and net worth.
Working capital includes your current assets minus your current liabilities. (This includes things like cash on hand, money other people owe you, the money you owe, and inventory…including built houses for sale and developed lots for sale.)
Net worth is total assets minus total liabilities. (This is generally a snapshot of your overall financial situation at a particular moment in time.) Whichever of these is smaller is the number the Board uses to determine your monetary limit.
For example, if you have $10,000 in working capital and your total net worth is $25,000, you would be given a monetary limit of $100,000 ($10,000×10). That means that you would be able to bid on projects up to that amount, but not beyond.
It is worth noting that you cannot split one project into two parts in order to get around your monetary limit. Using the example above, you would be breaking the law to bid on a $200,000 project by saying $100,000 is for a foundation and framing job and a separate $100,000 is to complete an unfinished, recently framed, building (that just happens to be at the same address).
What if Your TN GC License is Too Limited?
At some point, your contractor business will begin to grow if you continue to earn a reputation for delivering quality work on time and within budget. When that happens, you’re going to want to be able to bid on bigger and bigger projects.
However, if your monetary limit is holding you back, you won’t be able to.
You’ll feel stuck doing “small” jobs when you and your crew are qualified to take on much larger contracts. And when your schedule is packed full of lots of smaller projects, it can begin to take a toll on you mentally and physically as you try to keep up in order to stay ahead financially.
If you were able to work on fewer projects but get paid more for them, it sure could simplify your life! Increasing your monetary limit is one way to help make that happen.
Options to Increase Your Monetary Limit
If you’re in that situation (or are about to be), you have a couple of options to increase your monetary limit. Once you do, you’ll find yourself in a much more competitive position.
1. Line of Credit
You can ask your bank to issue you a line of credit (LOC) if your working capital does not support the monetary limit you are requesting. (It cannot be used to supplement your net worth.) The Board will only accept a LOC from an FDIC-approved bank.
The LOC cannot be your only justification for an increase in your monetary limit. It is intended to supplement your existing working capital to bring it up to the level needed for the limit desired.
If you happen to have negative working capital, the Board will only consider 50% of your LOC as part of your request.
In order to have a LOC considered, you must include a letter from your bank on official bank letterhead in your exact business name as it appears on the financial statement you submitted to obtain your State of TN Contractor’s License. The letter must include the exact wording as this form letter.
2. Guaranty Agreement
This is a tool that can be used to increase your monetary limit which includes a financial statement from either the contractor personally or a parent company. It must show that the entity represented by the financial statement is financially solvent enough to cover the monetary limit that you’re applying for.
There are two types of guarantee that the Board will consider:
- Personal – The Board only advises using your personal financial statement “as a last resort” when you’re needing to fulfill current construction obligations. A personal financial statement prepared by the individual, a bank, or financial software is allowed in addition to the Reviewed or Audited financial statement that was prepared by an independent CPA in order to obtain your license.
- Corporate – If your contractor business is owned by another entity, that company can provide a personal statement from the owner (in addition to your official Reviewed or Audited financial statement). The parent company will need to be able to support 50% of the monetary limit.
You can download a PDF with details on Tennessee’s Guaranty Agreement Policy here.
How to Get General Contractor License in Tennessee
If you haven’t gotten your TN Contractor’s License yet, then that’s the first step you need to take. We covered that process in detail in this post: TN Contractor’s License Renewal Made Easy (And 5 Mistakes to Avoid).
You can also find information on How to Become a Contractor from the state’s official site.
CRS CPA Can Help Increase Your Monetary Limit
Contractors all over Tennessee have depended on us to be their partners for financial help and advice for over 40 years! Our team has the experience and knowledge you need…whether you’re working on becoming a contractor or needing to bid on bigger jobs.
Give us a call at (731) 668-4482 or schedule a call with one of our contractor accountants today!
