A contract bond guaranteed by the SBA has three parties. The “obligee” is the private or government project owner requiring the bond, and the bonded contractor (the “principal”) has the same rights as any other principal in a traditional surety agreement.
Many small businesses need help getting bond approval. The SBA helps cover many of the surety debt associated with settling claims on these contracts.
Why Do Contractors Need to Purchase Bid and Payment/Performance Bonds?
The SBA’s bond guarantee program gives small contractors a way to secure contracts they may have yet to be able to get approved for through traditional means. By paying up to 90% of the contract bond’s liability, the SBA helps reduce the risk for the surety company, encouraging them to write bonds for contractors that a regular bonding agency might not otherwise accept.
SBA-guaranteed contract bonds are legally binding contracts among the principal, the obligee, and the surety company. The claims process is much the same as any other contract bond, with the surety company investigating and settling valid claims on behalf of the bonded business.
While securing a bond with the help of the SBA may cost slightly more (0.6% of the bond amount), it’s worth the extra expense for a business that can only afford to take advantage of significant opportunities. And that’s the real reason the SBA’s program exists: to give small businesses a leg up on projects they might otherwise miss out on due to bonding issues.
How Does the SBA Surety Bond Guarantee Program Work?
The SBA acts as a reinsurer for contract surety bonds. The SBA agrees to cover up to 90% of the bond claim against an approved contractor, which significantly lowers the risk for the surety company and allows them to offer more bonding capacity to small contractors.
The contract surety bonds offered by the SBG program include bid, payment, and performance bonds for contractors that meet the SBA’s definition of a small business. License and permit surety bonds are not eligible for the program.
Once a surety bond application has been completed and submitted to the company, they will conduct their underwriting analysis to determine if they will issue the bond for the contractor. If the surety bond is issued, the bonding company will submit an SBA fee to the SBA on behalf of the contractor.
What Are the Requirements for a Surety Bond Guaranteed by the SBA?
Suppose a small business cannot obtain contract bonds from the standard surety bond market. In that case, the Small Business Administration has a guarantee program that allows it to back many of these bonds. Prior Approval Sureties still write these contract bonds through their normal underwriting process. Still, the surety will pay 80-90 percent of any claims against the bond if the principal fails to perform the obligations of the bond. In exchange, the principal pays a fee to the SBA, which is currently 0.6% of the bond’s penal sum.
This program can be challenging for contractors and often takes longer than a regular surety bond application. However, many insurance agents have experience working with clients who require these types of bonds. They will first attempt to place the bonds outside of this program, but if necessary, they can assist with an SBA bond application and assist their client.
How Much Does an SBA Surety Bond Cost?
The cost of a contract surety bond guaranteed by the SBA will vary depending on several factors, such as business size (the contractor must meet the SBA’s definition of small business), type of surety bond sought (only bid bonds, performance bonds, and payment and performance bonds are guaranteed under this program; license bonds are not), and contract size (non-federal contracts under $6.5 million and federal contracts up to $10 million qualify for the SBA’s guarantee).
The SBA also charges a fee separate from any the surety company charges. While the additional cost to secure a contract surety bond through this program is higher than securing one without the SBA’s backing, for contractors that cannot obtain their necessary surety bonds in the regular marketplace, it may be worth the added expense. Many businesses are prevented from bidding on or winning contracts without a valid bond. When the future of a business hangs in the balance, it is worthwhile to pay a little extra to get a surety bond guaranteed by the SBA.
