SBA bonds are surety bonds guaranteed by the Small Business Administration. Today we’ll take a deep dive into SBA bonds to help you understand what they are and if they’re suitable for your project.
The Basics of Surety Bonds
Contractors and construction companies often utilize surety bonds. A surety bond is a three-party agreement guaranteeing the fulfillment of services upon the risk of financial penalty. Simply put, a surety bond is a contract that binds a service provider to the service recipient and ensures that the job is done as promised.
The contract is issued by a third party. This is typically an insurance provider, whose role is to compensate the service recipient for any financial losses or damages. When the service recipient files a valid bond claim, the insurance company pays out. The service provider is expected to repay them in the agreed-upon period.
Essentially, the insurer’s role is to hold the service provider financially responsible, protecting the service recipient from getting ripped off.
Here’s an example:
- An independent contractor or contracting company looking to get bonded would go to an insurance company.
- Because the contractor provides the service, this makes them the principal in the bond agreement.
- The insurer would then issue the contract, agreeing to financially back the obligee if they cannot fulfill their promise to the client.
- This makes the insurance company the surety party.
- When a client, also known as the obligee, then employs the contractor, they are guaranteed to get the services they paid for. Or the contractor will be held to account by the surety.
Types of Surety Bonds
There are many kinds of surety bonds. Certain bond types may be required for specific contracting jobs. It’s important to note the difference between contract surety bonds, which we’re dealing with here, and commercial surety bonds, which are issued to licensed professional businesses to ensure they abide by government regulations.
The four most common types of contract surety bonds are bid bonds, payment bonds, performance bonds, and ancillary bonds.
How to Become Bonded
When it comes to qualifying for a bond, there are three main factors a surety will consider before issuing a contract:
- Financial statements: Reviewing net worth, capital, and profitability to ensure your business can meet any financial obligations that may arise in the present or future
- Credit resources: Checking the credit histories of the principal party’s individual members
- Technical and managerial ability: Assessing past projects, including management and accounting records, to determine your business’s ability to complete future projects
Essentially, a contractor must meet the expectations of the surety before they can even be issued a bond. The principal should be able to complete a project adequately, and their past project history should reflect that ability. After all, surety bonds are a safety net—not a proper business plan.
No one involved in a surety bond contract really wants to file a claim: it’s laborious and time-consuming for the claimant. It’s also expensive and potentially damaging for the principal.
If an insurer feels that you will be unable to fulfill your contractual or financial obligations, they may choose not to bond you at all. Issuing a bond is a matter of risk assessment, and most insurance providers aren’t willing to bet on a risky investment.
The Challenges of Small Business Bond Approval
It’s not always easy for small business owners and operators to obtain bonding due to fiscal restrictions, credit, or lack of experience. In many cases, it can take years to build up a strong balance sheet where the contractor stands on their own.
Surety providers may require additional fees, collateral payment, and even hiring third-party individuals to oversee the fund disbursement process to support small businesses. It can be difficult for small businesses to work their way up the ladder when limited to unbonded jobs or very small bonded jobs.
That’s where SBA bonds come in.
Surety Bond Opportunities for Small Businesses
Plenty of insurance providers across America offer surety bonds, so what exactly makes an SBA process so unique?
The Surety Bond Guarantee Program
The U.S. Small Business Administration (SBA) offers a unique service: the SBA Surety Bond Guarantee (SBG) Program. The SBG Program is designed to help small and up-and-coming businesses get bonded. The ideal candidates for this program are contractors who have the skills and know-how but lack the experience and financial assets to be securely bonded outside of the program.
How It Works
With the support of the SBA, the balance of a contractor’s bank line-of-credit can be counted as available working capital. This additional amount will increase the contractor’s total available working capital. This collective number can then be used to establish the bond capacity.
Thanks to SBA, contractors can approximately double their available working capital and ultimately qualify for a bond capacity that is 10 to 20 times that amount. That’s the premise of the Surety Bond Guarantee Program. It’s all about taking a chance and empowering small businesses to thrive.
With the SBG Program, contractors can obtain bonds for as much as $6.5 million on projects for any owner and bonds up to $10 million on Federal-Prime projects. Qualifying contracts valued at $400,000 or under can even get a QuickApp product that may yield approval within a few short hours of program submission!
Getting an SBA Bond for Your Small Business
Getting bonded is an essential step for any contractor. Don’t let your finances hold you back from achieving greatness. If you’re a small business with big dreams, the SBA surety bond program may be right for you.
If you have any questions regarding the SBA-guaranteed surety bond, contact the experts at ZipBonds for more information. Our team is happy to answer your questions and help walk you through the bonding process.