SBA Surety Bond Guarantee Program: What You Need to Know

SBA Surety Bond Guarantee Program

Insurance agents can gain the knowledge they need from the SBA Surety Bond Guarantee Program to assist their contractor customers in obtaining a contract bond backed by the Small Business Administration. When a loss occurs on a guaranteed contract bond, the SBA reimburses up to 90% of the claim. This backing encourages surety companies to write contract bonds for contractors needing help to qualify.

What is a Surety Bond?

A surety bond is a three-party agreement that is enforceable in court. It holds one party accountable to a second party for fulfilling certain obligations. It is like an insurance policy in which the insured pays a premium and receives protection in case of an accident or loss. The SBA guaranty program provides an alternative to traditional methods of procuring contract bonds. It helps small businesses that may only meet some of the other bonding companies’ requirements and remove barriers to business opportunities. The SBA’s guarantee program works with a reputable surety company to issue and monitor the performance of the contract bonds. The surety company makes valid claims, settles them on behalf of the bonded contractor (the “obligee”), and then collects reimbursement from the bonded contractor for expenses. This standard agreement requires the same staff and procedures that other surety companies use in their regular operations.

How Does the SBA Guarantee Bond?

Small and new contractors who lack resources and expertise have been aided by the SBG program of the U.S. Small Business Administration to obtain bonds via conventional commercial channels. The program makes surety companies willing to write a bid, payment, and performance bonds for eligible contractors who may need more credit, capacity, or character to qualify through regular commercial channels. The bonded contractor and the government body or organization that needs the bond can profit from the program in several ways. Among other things, the bond protects the government against default by the contractor. OSG’s regulations cover both programs, one requiring prior SBA approval of each bond guarantee (the Prior Approval program) and the other not requiring prior SBA approval (the PSB program). OSG’s determination to cancel or revoke a guaranteed line is based on the following: While securing a guarantee from SBA will cost your company slightly more than securing the same bond on your own, it can remove what would otherwise be a significant barrier to new business opportunities. These barriers often impede growth for many businesses, especially those seeking federal work in contracts and projects.

How Does the SBA Help Surety Companies?

The SBA helps the surety companies that offer contract bonds by agreeing to back 80% to 90% of each bond. It means the insurance company can avoid risking as much of its own money, making them more willing to provide bonds to small business owners who may need help obtaining them otherwise. In addition, the SBA streamlines the application process and guides surety agents and small businesses alike. It can help speed up the approval process and reduce any confusion. After the surety company completes its underwriting analysis, it will issue the contract bond to the bonded contractor (the “Principal”) via an agreement between the Principal and the Bonding Company. If a claim is filed against the contract bond, the bonding company will pay it on behalf of the private or government project owner requiring the bond (the “Obligee”) and then seek reimbursement from the Principal.

How Does the SBA Help Small Businesses?

The SBA’s guarantee helps small businesses by removing what can be a barrier to getting the bonds they need. By backing the surety companies and their agents, they take on less risk and can offer bonds to more small business applicants. The program also helps ensure that small businesses can compete for federal contracts and can win sole-source or set-aside opportunities. It is especially beneficial for former military service members, veterans, or spouses who want to start their businesses. The SBA has many programs that help small business owners access capital or improve their credit. These include loans guaranteed by the government, microloans, and disaster assistance. They also provide entrepreneurial training for new business owners and offer resources that provide mentoring and financial support to former military service members and their spouses. They can also connect entrepreneurs with government contracting opportunities through the Emerging Leaders Initiative. The organization’s programs help military veterans and their families, C-level executives, and aspiring entrepreneurs.