November 24, 2023

SBA's Surety Bond Program

Investopedia defines surety as "a promise or agreement made by one party that debts and financial obligations will be paid. In effect, a surety acts as a guarantee that a person or an organization assumes responsibility for fulfilling financial obligations in the event that the debtor defaults and is unable to make payments." Moreover, "The party that guarantees the debt is referred to as the surety or the guarantor. Sureties can be made by issuing surety bonds, which are legal contracts obligating one party to pay if the other fails to live up to the agreement."

Benefits of having a surety bond include:
  • Protection against financial loss since a surety bond can protect your business from financial losses in the event that someone sues you or if you break a contract;
  • Shows that you are a responsible business;
  • Getting help in obtaining financing as banks and other lending institutions may be more likely to lend money to businesses that have a surety bond;
  • Helps you comply with regulations as certain regulations may require businesses to have a surety bond in order to operate; and
  • Helps you get government contracts as many government organizations require businesses to have a surety bond before they will award them a contract.

In conversation with a friend who owns a small business that is trying to win contracts, I introduced him to a program within the U.S. Small Business Administration Bond Guaranty Program that issues surety bonds which provides the customer with a guarantee that the work will be completed.

According to the SBA, "Many public and private contracts require surety bonds, which are offered by surety companies. The SBA guarantees surety bonds for certain surety companies, which allows the companies to offer surety bonds to small businesses that might not meet the criteria for other sureties."

The SBA Surety Bond Program is segmented into four steps:
  1. Surety bonds are requested: Some contracts require that the business doing the work be properly bonded.
  2. Surety partners with business: Authorized surety companies provide surety bonds to businesses that meet their qualifications.
  3. SBA guarantees: SBA guarantees surety bonds for private surety companies, so more small businesses can qualify.
  4. Small businesses benefit: Small businesses get SBA-guaranteed surety bonds so they can get to work.
The U.S. government agency importantly explains that it "guarantees contract bonds, but doesn’t guarantee commercial bonds. Contract bonds ensure the terms of a specific contract are fulfilled. Commercial bonds ensure all applicable laws and regulations are followed. Government agencies require certain companies or individuals to obtain commercial bonds, which protect the general public against things like fraud."

What is more, "Some contracts require surety bonds that cover specific situations. SBA guarantees surety bonds that cover several major categories of work":
  • Bid: Ensures full payment and performance bonding from the contract bidder.
  • Payment: Ensures full payment to the suppliers and subcontractors.
  • Performance: Ensures full completion of a contract by small business.
  • Ancillary: Ensures completion of requirements outside of performance or payment, such as maintenance.

With respect to the bond guarantee fee, the SBA notes that "all performance and payment bond guarantees require small businesses to pay SBA a fee of 0.6% of the contract price. If for some reason the bond is cancelled or not issued, SBA will return the guarantee fee. SBA does not charge a fee for bid bond guarantees."

Eligibility criteria in obtaining a surety bond include qualifying as a small business according to the SBA's size standards, have up to $6.5 million for non-federal contracts and up to $10 million for federal contracts, and meet the surety company’s credit, capacity, and character requirements.

What has been your experience with surety bonds?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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