What is the Small Business Administration’s Surety Bond Guarantee Program?
The SBA Surety Bond Guarantee Program (SBG) is a useful instrument for small business financing and retention. For any financial institution that signs into an agreement with the agency, the program provides a bonding capacity of up to $2 million.
A bank or surety utilizes its capital to cover the bond, earning a premium from the government in addition to its cost of capital. Small enterprises that have been unable to get appropriate funding from conventional or public sources of capital may benefit from SBG’s bonding capabilities.
The Surety Bond Guarantee Program is one of the US Small Business Administration’s initiatives to assist small firms to get bond financing. For federal government contract bonds, the program offers an alternative to standard surety bonding by allowing them to be paid directly by the Department of Transportation (DOT).
What are surety bonds issued by the Small Business Administration (SBA)?
SBA surety bonds are contracts between a contractor and an SBA-approved commercial surety that obligates the surety to pay subcontractors, suppliers, or others that provide goods or services in support of a prime contract if the prime contractor fails to satisfy their payment obligations.
Surety bonds are issued by insurance firms and safeguard creditors in the case of a contract breach on the part of the insured.
A bond is a contract between three parties: the principal, who is you or your company; the obligee, who is usually a customer or government agency who requires a surety bond before hiring you; and the surety company, which must promise to pay any claims against you up to covered limits if you fail to perform as required. On federal contracts, surety bonds are frequently required.
What is the mechanism behind it?
Through a surety provider, the Small Business Administration (SBA) guarantees up to 85% of the bond face value. Your company’s credit rating and financial capability guarantee the remaining 15%. In other words, if a small firm would otherwise be unable to access the bond market, the SBA program allows them to do so by removing part of the risk associated with doing business with you.
Payment from the prime contractor is not required until after products or services have been supplied under a specific government contract, which allows for more efficient use of federal contract resources. This eliminates the late payment delays that are common with traditional bonding arrangements. There are a few more benefits to this program that are stated below.
Who is eligible to take part?
Your company must have fewer than 500 employees and be majority-owned by U.S. citizens or lawfully admitted aliens resident in the United States to be eligible for the SBA Surety Bond Guarantee Program.
There are no geographical restrictions on participation; however, if you’re based outside the US, your company must be considered an eligible legal entity under US law (e.g., a corporation for profit) in order to apply through the SBA program; it cannot be wholly owned or operated by non-US citizens or entities, nor by subsidiaries of foreign companies controlled by foreign nationals (I .e., “offshore subsidiaries”).
You’d also have to meet SBA size requirements for the NAICS code you’re bidding on. Your application will be rejected if you do not comply.
What are the advantages of utilizing this software?
Surety bonding can be expensive based on a contractor’s creditworthiness and ability to meet contract requirements. SBA-guaranteed bonds become appealing in this situation.
The SBA helps small businesses compete in today’s global marketplace by removing some of the risks of doing business with them by providing them with more inexpensive cash so they can grow their enterprises tremendously through federal contracts. Smaller businesses can now get the same bond rates and terms as larger businesses, even if they don’t have the same credit history or financial resources.
Small businesses receive a high percentage of federal contracts, thus competition for government contracts is fierce. Contractors who use this scheme to access the bond market have an advantage in bidding since their bond premiums are lower. Smaller contractors often spend 8-11 percent of their contract income on bonding requirements, but bigger contractors spend only 5-6 percent of their revenue on bonding.
What are the constraints?
Traditional contractor bonds were not intended to be replaced by the SBA Surety Bond Guarantee Program. The program is intended to give contractors a different way to finance huge government contracts. Because it does not guarantee bid or performance bonds, you’ll need to get a different kind of bond from your lender.
Generally speaking, the restrictions are based on the quantity and nature of your federal government transactions. SBA surety bonds can only be used in conjunction with prime contracts worth $3 million or more (unless you’re looking for subcontractor payments under that contract), and they can’t be used in conjunction with commercial loans, insurance policies, or any procurement actions involving non-appropriated funds (NAF).