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Surety Bonds: How SBA Can Help Your Small Business Obtain This Centuries-Old Assurance

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by: byrned
Updated: Monday, April 30, 2012 - 18:59
Created: Wednesday, November 2, 2011 - 16:01

The idea behind surety bonding is simple and direct.  One person, or entity, guarantees to another that a third person will perform a contract according to its terms.  Historical records show a personal surety assuring Pharaoh that a farmer will place an agreed upon amount of grain, of a specific quality, and by a certain date, into Pharaoh’s coffers.

Small business contractors and service companies that want to become more competitive and bid on projects requiring surety bonds, can look to the U.S. Small Business Administration for the help they need to step up to that next level of business success.

Because of the protection surety bonds provide, the Miller Act of 1935 requires surety bonds on federally-funded construction projects in excess of $100,000.  Today, virtually all states have their own statutes and now almost every public construction project across the country requires surety bonds.

SBA's Surety Bond Guarantee Program

The SBA’s Surety Bond Guarantee Program can help small business contractors and manufacturers overcome challenges they face in winning government contracts and private-sector contracts, and in the process help them get that next bond and contract, and the next.

Half of all construction firms in business today, however, will not be in business six years from now, according to the Associated General Contractors, a construction industry trade association.  An economic downturn, labor difficulties, material shortages, the death of a key employee, equipment problems, bad weather, even fraud, can bring a project to a standstill, often causing the contractor to default and bills to go unpaid.

When a government entity awards a construction project to the lowest bidder, it knows that the surety bond company stands behind the contractor’s promise to complete the job according to the owner’s specifications and terms of the contract.  Often, however, new and small businesses may not be able to obtain bonds through regular commercial channels.

With the SBA’s Surety Bond Guarantee Program the SBA guarantees surety companies against a percentage of the losses sustained as a result of a contractor’s default on a guaranteed bid, payment or performance bond, making them more willing to issue bonds for smaller, newer companies.  The SBA can guarantee bid, payment and performance bonds for construction, service, and supply contracts up to $2 million for eligible small contractors.

Program details

The overall SBA program consists of the Prior Approval Program and the Preferred Surety Bond Program.  Under the Prior Approval Program, the SBA provides sureties an 80 or 90 percent guarantee to issue bonds on behalf of small businesses, and the surety must obtain SBA’s prior approval for each bond.  SBA guarantees 90 percent for bonds on contracts up to $100,000, and on bonds for socially and economically disadvantaged contractors, veteran owned or service-disabled-veteran owned firms.  Certified HUBZone contractors are eligible for the 90 percent guarantee under the Prior Approval Program.  More information on the HUBZone Empowerment Contracting Program is available at www.sba.gov/hubzone .

Under the Preferred Surety Bond Program, selected sureties receive a 70 percent bond guarantee and are authorized to issue, service and monitor bonds without the SBA’s prior approval.

The SBA charges fees to both the contractor and the surety company. Rates are published periodically in the Federal Register.  The SBA does not charge the contractor a fee for a bid-bond guarantee.

Using the SBA’s Surety Bond Guarantee Program can open up more business opportunities for small businesses. It could pave the way to obtaining a federal, state, county, municipal or private-sector contract, and another, and another, and another.

For more complete information on the Surety Bond Guarantee program, visit www.sba.gov/osg for a list of area office contacts and SBA offices near your business.

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Type: Community Blog