SBA Surety Bond Guarantee Program: How Does It Work?

SBA Surety Bond Guarantee Program: How Does It Work?

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One of the problems small contracting companies face is potential clients who are wary that a contracted project won't be satisfactorily completed. To help allay those fears, a contractor can provide a surety bond, which guarantees completion of the work. In fact, many government programs and private entities require contractors to provide surety bonds in order to receive a contract. A surety company or agent is responsible for issuing the bond in return for a fee.

How the SBA Surety Bond Program Program Works

The Small Business Administration Surety Bond Guarantee Program guarantees a portion of a surety bond as a means of inducing a participating surety to issue the bond when it otherwise wouldn't. This helps small businesses win contracts.

The SBA guarantees four types of surety bonds:

  • Bid: Ensures performance bonding for the contract bidder.
  • Payment: Ensures full payment to subcontractors and suppliers.
  • Performance: Ensures that a small business will fully complete a contract.
  • Ancillary: Ensures completion of requirements other than payment or performance, for tasks like maintenance.

The process starts with a small business applying to an SBA-authorized surety company for a surety bond. The applicant must meet certain criteria set by the surety agent and the SBA. The SBA guarantees the bonds issued by the surety agent, either on a case-by-case basis or as a certain percentage of all bonds issued by the agent. The surety bond is given to the contracting entity, allowing the contractor to bid on and get the contract. If the contractor defaults on its contract, the SBA reimburses a specified percentage of expenses and losses incurred.

The SBA offers three surety bond guarantee programs.

  • Prior Approval Program: In this program, each surety bond guarantee is approved separately by the SBA.
  • Quick Bond Program: This is a subset of the Prior Approval Program for companies with infrequent need for a bond. The program offers streamlined underwriting and paperwork requirements in exchange for a smaller maximum guarantee amount.
  • Preferred Surety Bond Program: Under this program, the participating surety agent can issue, monitor and service surety bonds without the SBA's prior approval. The terms may vary among different surety agents, based on their previous interactions with the SBA.

Terms and Fees

The following table summarizes the terms and fees of the SBA Surety Bond Guarantee Program.

Guaranteed PercentageThe maximum percentage of contract value guaranteed by the SBA.90% for contracts up to $100,000 or for a business owned and controlled by socially or economically disadvantaged individuals, veterans, service disabled veterans, or certified HUBZone and 8(a) businesses. For all others, guarantee percentage is 80% to 89%.
Maximum Contract AmountCap on the eligible contract amounts.$10 million for federal contracts, $400,000 for Quick Bond Program, and $6.5 million for all others.
Bond PremiumThis is a fee set by the surety agent.Typically ranges from 1.8% to 2.5% of guaranteed amount.
SBA FeePercentage of contract value, charged by the SBA.0.729% of contract value.
Aggregate Bond CapacityThe maximum bond amount guarantee based on the contractor's working capital and unused credit.20 times the sum of a company’s working capital, which is current assets minus current liabilities, and unused credit, such as revolving credit lines. Expressed as 20 x (working capital + unused credit).

Eligibility Criteria

The following are the eligibility requirements for the SBA Surety Bond Guarantee Program.

  • Size standards: The contractor must meet the SBA size standards, which set a maximum on either the number of employees or gross annual revenues for each type of business. For example, the maximum size of a roofing contracting company is $15 million in revenues, whereas a cut-and-sew apparel contractor can have up to 750 employees.
  • Capital requirements: The contractor must have sufficient cash flow and liquidity to complete the project. This is known as the aggregate bond capacity and is up to 20 times the sum of the company's working capital (that is, current assets minus current liabilities) and unused credit (such as a revolving credit account). The actual capital requirements can be set by the SBA on a case-by-case basis.
  • Capacity: The surety agent evaluates the contractor's previous projects and demonstrates the capacity to finish the specific contract work.
  • Character: The surety agent will evaluate the company's owner/management for derogatory information such as bankruptcies, criminal convictions and tax liens.
  • Quick Bond Program: This program doesn't allow contracts for environmental work, multiyear contracts, and excessive warranty and liquidated damages provisions.
  • No alternatives: You must demonstrate that you can only get the surety bond if it is guaranteed by the SBA.
  • Independent business: You must demonstrate that your business is independently owned and operated. It must be a for-profit proprietorship, partnership, corporation, association or joint venture; located in the U.S.; and not have any conflicts of interest with the surety agent or the SBA. The contractor cannot be currently involved in a bankruptcy or have unresolved tax debts.
  • Eligible surety agent: The surety agent must be approved by the U.S. Treasury to issue bonds on federal contracts. The Treasury approves the maximum amount the surety agent can bond. The surety agent can be disqualified for lacking business integrity, suffering an adverse civil judgment or lying to the SBA.
  • Partial subcontract: The contractor must certify the percentage of work that will be subcontracted out.
  • Contract eligibility: An eligible contract must include a specific period of performance, specify a contract amount (on its own and in aggregate with other contracts) within the program limits, require bonding, and allow the surety agent to complete the contract or pay a penalty amount in case of default.

Application Process

Applicants applying for the Quick Bond Program fill out SBA Form 990A. Applicants to the Prior Approval Program and the Preferred Surety Bond Program fill out SBA Form 994. The types of information required includes:

  • Identification information for company and owners/managers.
  • Type of trade.
  • Three largest contracts in the last five years.
  • Information about the contract under bid.
  • Certification that the borrower meets eligibility requirements.

The form can be filled out on paper or electronically via an SBA app. The surety agent is allowed to fill out the contractor's portion of the application form.

Other forms to be filled out are:

  • SBA Form 912, Statement of Personal History: Completed by each owner who owns at least 20% of the business's equity, as well as directors, officers and general partners. This form contains information about any previous criminal activity.
  • SBA Form 991, Surety Bond Guarantee Agreement Addendum: Submitted if work on the contract has already started, this form reports amounts billed and paid and any lien waivers (acknowledgements by subcontractors that they have been paid). The contractor must explain why work proceeded before the bond was obtained.
  • SBA Form 994F, Schedule of Work in Process: Contains information about uncompleted work. Must be resubmitted every 90 days.
  • SBA Form 413, Personal Financial Statement: Must be filled out by everyone who submitted Form 912. Contains information about the personal wealth of each applicant.

The forms are submitted to the surety agent, which adds information about the surety bond, including contract amount, fee and anticipated project start/end dates. Once the surety agent approves the form, it forwards it to the SBA for approval if the agent participates in the Prior Approval Program. Otherwise, the surety agent handles the remaining tasks to provide the bond to the contractor.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.