SBA Surety Bond Guarantee Program – A Useful Tool For Contractors

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What is the SBA Surety Bond Guarantee Program?

The SBA Surety Bond Guarantee Program (SBG) is a helpful tool in financing and retaining small businesses in the market. The program provides a bonding capacity of up to $2 million for each financial institution that enters into an agreement with the agency. 

A bank or surety then uses its capital to cover the bond, while also earning a premium from the government on top of its cost of capital. SBG’s goal is to improve access to bonding capacity for small businesses which have been unable to obtain adequate financing through conventional or public sources of capital.

The Surety Bond Guarantee Program is part of the U.S. Small Business Administration’s efforts to help small businesses access the bond market. The program provides an alternative to traditional surety bonding for federal government contract bonds, allowing them to be paid directly by the Department of Transportation (DOT).

What are SBA surety bonds?

SBA surety bonds are security agreements executed between a contractor and an SBA-approved commercial surety, obligating the surety to pay subcontractors, suppliers, or others providing goods or services in furtherance of a prime contract when the prime contractor fails to meet their payment obligations.

Surety bonds are written by insurance companies and provide protection to creditors in the event of a breach of contract on the part of the insured. 

The bond is an agreement between three parties: the principal, who is you or your business; the obligee, which is typically your customer or government agency requiring that you have a surety bond before allowing you to work for them; and the surety company, which must promise to pay any claims against you up to covered limits if you should fail to perform as required. Surety bonds are often required on federal contracts.

How does it work?

The Small Business Administration (SBA) guarantees up to 85% of the bond face value through a surety provider. The remaining 15% is guaranteed by your company’s credit rating and financial capacity. In other words, if a small business could not otherwise access the bond market, the SBA program gives them a better chance to get bonded by taking some of the risks out of doing business with you. 

As an added benefit, it also allows for more efficient use of federal contract dollars since payment isn’t required from the prime contractor until after goods or services have been rendered under a specific government contract. This reduces late payment delays that normally occur when traditional bonding methods. Some other advantages of this program are listed here.

Who can participate?

To participate in the SBA Surety Bond Guarantee Program, your business must have fewer than 500 employees and be majority-owned by U.S. citizens or lawfully admitted aliens residing in the United States. 

There are no geographic limitations on participation; however, if you’re outside the United States, your company must be considered an eligible legal entity under U.S. law (e.g., a corporation for profit) to apply through the SBA program; it cannot be wholly owned by non-U.S. citizens or entities, nor operated by subsidiaries of foreign companies controlled by foreign nationals (I .e., “offshore subsidiaries”). 

Additionally, you would need to meet SBA size standards for the North American Industry Classification System (NAICS) code under which your company is bidding. If you do not, your application will be denied.

What are the benefits of using this program?

Typically, the cost of surety bonding can be quite high depending on a contractor’s creditworthiness and capacity to comply with obligations under their contract. That’s where SBA-guaranteed bonds become an attractive option. 

By taking some of that risk out of doing business with you, the SBA helps small businesses compete in today’s global marketplace by giving them access to capital at more affordable rates so they can grow their businesses exponentially through federal contracts. The program makes it possible for smaller companies to have access to the same bond rates and terms as larger companies, even though they may lack a credit history or financial capacity.

With a large percentage of federal contracts going to small businesses, competition for government business is strong. Contractors that can access the bond market through this program have an advantage when bidding because they pay less in premiums for their bonds. Typically, smaller contractors spend about 8-11% of their contract revenue on bonding costs while larger contractors spend only about 5-6% of their revenue on bonding requirements. 

What are the limitations?

The SBA Surety Bond Guarantee Program was not intended to replace traditional contractor bonds. The program is designed to provide contractors with an alternative financing solution for bonding large government contracts. It does not guarantee bid or performance bonds, so this would typically require a different type of bond with your lender. 

Generally speaking, the limitations are mostly related to the size and nature of your transactions with the federal government. SBA surety bonds can only be used in connection with prime contracts valued at $3 million or more (unless you’re seeking subcontractor payments under that contract), they cannot be used in connection with commercial loans, insurance policies, etc., and they cannot be used in connection with any procurement actions involving non-appropriated funds (NAF). 

Want to know more about surety bonds? Check our Alpha Surety Bonds now!

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