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

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

By nicoj
Published: April 2, 2012 Updated: July 12, 2016

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?              

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About the Author:

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