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SBA Surety Bonds, Pt. 1: What’s A Surety Bond, and When Do I Need One?

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SBA Surety Bonds, Pt. 1: What’s A Surety Bond, and When Do I Need One?

By nicoj
Published: April 2, 2012 Updated: March 7, 2013

Are you a contractor bidding on work that requires a surety bond?  Do you have questions about what a surety bond is, why you might need one, and how to get one?

If so, SBA may be able to help.

SBA guarantees surety bonds for small contractors that might not qualify otherwise – and the process of getting the guarantee is easier and faster than you might think.  For example, SBA’s Office of Surety Guarantees usually processes applications for bond guarantees within two days, processing claims in just nine days.

In this blog, Part 1 in our series on SBA’s Surety Bond Guarantee Program, we’ll go over the basics: how surety bonds work; why your business might need one; and how SBA can help you get a bond.

What’s A Surety Bond?

First things first: what’s a surety bond, anyway? Essentially, a surety bond is an insurance policy between the contractor, the client and a third-party surety bond company that covers your promise – and ability – to complete the terms of a contractual agreement.  Instead of you having to put up cash as a deposit, you get a surety bond.

When Will I Need A Surety Bond?

If you want to bid on public construction contracts and many private contracts, you’ll probably need a surety bond.  For example, surety bonds are mandatory for any federally-financed construction project valued over $150,000 and are mandatory on many state projects as well.  Commercial contracts for manufacturing and service or supply work may also require a surety bond.

How SBA’s Guarantee Can Help You Get a Surety Bond

Under the Surety Bond Guarantee Program, SBA guarantees surety bonds for small businesses in federal, state, local and commercial contracts and subcontracts.  SBA guarantees include construction, services and supply contracts.

The program is intended for small companies that may not otherwise qualify for conventional surety bonds.  Small companies, after all, might lack either the contracting experience or the financial strength to get a surety bond directly from a surety company.  That’s where SBA can step in, by leveraging its federal partnership with the surety industry to guarantee a bond and help mitigate the risk of contract default.  Surety companies that work with SBA are certified by the U.S. Department of the Treasury

SBA guarantees three types of surety bonds: bid bonds, payment bonds, and performance bonds.  Each protects a different aspect of the bidding process and the contract.  For more information on their differences, see our Surety Bonds: Explained page.  We’ll also learn more about the different kinds of bonds offered and the ways in which SBA guarantees them in Part 2 of this blog series.

Am I Eligible? How Can I Apply?

Because SBA does not offer bonds directly, you’ll need to first apply with a surety company or agent.  The underwriting for surety bonds varies depending on the issuer, but there are a few key factors that most sureties consider when evaluating your company’s application.  Among these are: the adequecy of working capital and cash flow to complete the project; past performance history, business debt and equity, and the capacity to complete the contract, and the personal history and character assessment.   Surety companies often refer to these requirements as the “three C’s – capital, character and capacity.”  More information is available on our SBA Surety Bond Guarantee application page.

You’ll also have to meet several SBA requirements.  Most importantly, SBA guarantees are to small businesses that cannot secure a bond on their own.  The contract in question must also be valued at less than $2 million; and your business must qualify as “small” according to SBA’s size standards / NAICS code.

Once you’ve found a surety company or agent, you can get started.  For the SBA portion of the application, our forms page has the needed paperwork.

Program Fees

There are several fees associated with both the commercial bond and the SBA guarantee.  Read our fees page to learn more.

Additional Resources

To learn more about applying, call SBA’s Office of Surety Guarantees at (202) 205-6540, or visit the links provided below:

Have your own surety bond questions, comments or insights?              

Please share and join in on our conversation!  You can follow our surety bond tweets with hashtag #SBAsuretybond, or post on our Facebook wall.  

About the Author:

Nico Janssen
My name is Nico and I'm serving as a moderator for the Community.

Comments:

To put it simply, they guarantee that specific tasks are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract. The principal is the individual or business that purchases the bond to guarantee future work performance. The obligee is the entity that requires the bond. Obligees are typically government agencies working to regulate industries and reduce the likelihood of financial loss. The surety is the insurance company that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the task. The obligee can make a claim to recover losses if the principal does fail to fulfill the task. If the claim is valid, the insurance company will pay reparation that cannot exceed the bond amount. The underwriters will then expect the principal to reimburse them for any claims paid.
Great article, Nico! The requirements for contract bonds are typically a bit tougher than those for license/commercial bonds but definitely manageable for most businesses. Fortunately for those in need of a license bond, there are also poor credit programs out there where the 3 C's of credit don't apply. It is always good to have educational articles like this one to show just how straightforward the process is and to give more clarity to all business owners who are in need of a surety bond. Keep up the good work, SBA!
We handle surety bonds on a regular basis, and I must say the SBA does an amazing job at assisting companies in this regard. It is not a simple process, but the assistance is top-notch.
Thank you for the article. I know that it's certainly tough to get started writing, especially in a way that's useful and interesting.
Thank you for the article. I know that it's certainly tough to get started writing, especially in a way that's useful and interesting.
Nico: Thank you for the basics on surety bonds. I know that we sometimes spend too much time talking about the advanced things and forget all about the blocking and tackling of surety bonds (bid bonds, contractor bonds, etc.). What we forget is that, even though this is perfectly undersandable to us, that our clients are unsure about the process. And by "unsure," I mean totally lost. Thanks.
Thanks for providing all this valuable information on the surity bonds. I never knew what the hell they are until I read this article. I think I am going to apply for these bonds shortly.

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