Business
What Makes Up SBA Surety Bond Guarantee Program
Many federal and state projects need contractors to be bonded to submit a bid. The SBA’s Surety Bond Guarantee Program helps make contract bonds available for small and new construction businesses that cannot qualify through standard commercial channels. When evaluating a contractor’s ability to receive a bond, working capital is one of the most essential underwriting considerations for surety companies. However, equity (assets minus liabilities) is also considered.
Working Capital
The SBA’s Surety Bond Guarantee Program encourages sureties to issue bid, payment, and performance bonds for small businesses that would not usually meet the standard required to obtain these bonds in the regular commercial marketplace. This federal backing eliminates some of the risks for the surety and gives them more incentive to approve these bond requests that they might otherwise decline. Contractors must purchase a bid bond and performance and payment bonds to do business on federal, state, or local projects that exceed $100,000. It is due to the Miller Act, which requires contractors on public works projects to obtain these types of bonds. Most contractors seeking these bonds work with a professional surety agency. These professionals help the contractor assemble and submit the required financial information to the underwriter. It reduces the time it takes to get the bond and increases access to more jobs. However, some contractor characteristics consistently limit their ability to be approved for a surety bond, such as prior bankruptcies, existing liens, low working capital, and limited experience on specific sizes and types of projects.
Equity
The small business administration’s SBG program provides financial backing, or guarantee, to contract surety bonds for businesses that cannot obtain them through the standard bond market. It allows bonding companies to offer bid, payment, and performance bonds to small contractors that may otherwise need help to meet their underwriting standards. Unlike bank guarantees, bond decisions are based on working capital (net worth). That is why most standard bonding companies do not write contractors with negative equity. A bonded contractor will only be removed from the program if it is determined that there has been a substantial regulatory violation. Contact a Surety Bond Professionals agent today to discuss the benefits of an SBA-guaranteed surety bond. We can help you secure the bond necessary to win that next project!
Credit
While insurance covers property damage and workers’ compensation, surety bonds cover the cost of a job not completed by the principal (the small business owner). It’s typical for construction jobs or projects done by government agencies to require a contract bond. Like an insurance company, a surety bond provider does due diligence before issuing the bond. It weighs the size of previous projects, the financial stability of the business and its owner, and its credit score. The SBA guarantee helps reduce the risk for the surety company and allows them to provide a bond that might otherwise be declined. That’s because SBA agrees to pay up to 90% of the losses sustained by the surety company for a fee, significantly lessening their liability. It’s essential to understand if your business qualifies for the SBA bond guarantee program and take the necessary steps to get bonded.
Liens
The SBA guarantees bid, payment, and performance bonds for contractors that traditional commercial insurers would otherwise decline. In doing so, the SBA assumes 80% to 90% of any losses sustained by the surety, giving them much more incentive to approve small and emerging contracting businesses for bonding. Many contracts require a bond to guarantee the terms of the project. It protects the obligee, such as the governmental agency, and any subcontractors or suppliers that work on the job. Typically, these bonds require CPA-reviewed or audited financials with specific working capital, net worth, and profitability standards. Those requirements can often make it difficult for smaller, more established companies to qualify for the bonds they need to grow their business. The program allows these contractors to take on more projects, helping them build their capacity and strengthen their credit. They’re also expected to eventually “graduate” from the program and become bondable.
Harper Harrison is a reporter for The Hear UP. Harper got an internship at the NPR and worked as a reporter and producer. harper has also worked as a reporter for the Medium. Harper covers health and science for The Hear UP.