The SBA bond guarantee program is an excellent way for contractors to qualify for contract surety bonds. The SBA covers as much as 90% of the bonding company’s losses if there is a claim on the contract.
These bonds allow small businesses to bid on projects that they would not be able to get approved for based on their size and the standard surety underwriting requirements for credit, capacity, and character.
Increases Your Chances of Getting Approved
Bonding issues can be a huge obstacle for some business owners and entrepreneurs. By partnering with surety bond companies and their agents, the SBA removes a significant barrier for many small contractors, making obtaining the bonds they need to bid on projects and secure contracts easier.
Typically, the SBA will guarantee the bond up to 80% or 90% of the liability, reducing the risk to the surety company. Applicants must meet the underwriting standards of the program, including credit, capacity, and character. However, the SBA can consider bank line of credit availability, which is only sometimes the case with standard surety companies that usually only look at analyzed working capital and net worth.
A typical surety bond arrangement involves three parties: the bonded contractor (the principal on the bond), the surety company, and the obligee. The SBG program has the same structure but offers more value for small businesses by increasing their chances of getting approved and lowering their risk.
Lowers Your Risk
By agreeing to cover a large percentage of the debt associated with settling claims (80-90%) on bonded small businesses, the SBA lowers the risk for surety companies and allows them to bond more small contractors that wouldn’t otherwise qualify.
This program helps small construction companies, general contractors, subcontractors, and service providers who have trouble qualifying for contract bonds because of their credit, financial standing, or lack of experience with bonded projects. The SBA guarantee program solves this problem by allowing these contractors to secure bids, performance, payment, and specified ancillary bonds for work on local, state, and federal contracts.
While the SBA covers much of the risk of bonding these small business contractors, the surety company still charges its normal premium. These premium rates vary on a per-application basis. They are based on many factors, including the contracted project size, the applicant’s credit score and finances, and industry experience.
Saves You Money
Many small businesses can only secure a contract bond through regular commercial channels if they have the required credit history or performance record. As a result, they’re barred from bidding on projects and growing their business, which costs them sales and opportunities.
The SBA’s surety bond guarantee program can help many small and emerging contractors. The SBA guarantees bid, performance, and payment bonds for contracts of $6.5 million or less. The SBA charges 0.6% of the bond fee for this service.
In the end, a contractor seeking an SBA bond must still qualify as a small business by the federal financial guidelines and meet any specific bond requirements from their obligee (contractor’s customer). Once they approve the bond, the contractor pays the SBA fee.
Increases Your Credibility
Many contracts require bonding to provide financial guarantees that the contract will be performed. However, it can take some work for small business owners to meet the minimum requirements. Luckily, the SBA has a program that can help!
SBG program facilitates federal, state, local, and private contracts by guaranteeing bid, performance, payment, and specified ancillary bonds for small and emerging contractors. The program works by partnering with surety companies to guarantee the bonds, making them more accessible to small business owners.
While the bond premium varies per application, the SBA guarantee lowers the risk for the surety company. It allows them to offer the bonds to small businesses that may not otherwise qualify. The surety will investigate and settle valid claims if a claim is made. The SBA will reimburse the surety for any losses they incur.