Bonding is based on the principle of the “three Cs” of underwriting – character, capital, and capacity. But for many contractors, poor credit and/or lack of capital are the main reasons why a surety company may choose to not extend surety credit for performance and payment bonds.
When this happens, a contractor is forced to find creative ways to get bonding, including posting collateral or agreeing to tools such as funds administration to back its bonds. With this understanding, the Small Business Administration developed a program years ago to help contractors with capacity or credit issues.
Today, the SBA has a couple different programs to help. Below is a description of some of the programs, eligibility requirements, and bond limits and fees for the SBA program.
How it Works
- A surety company is still the entity that issues the bond and has to respond to claims, pay out on claims, and close out bonds. However, the SBA provides a guaranty to the surety company to motivate the surety to issue bonds it might otherwise not
- SBA gives a 90% guaranty to the surety company for Veteran owned, minority owned, 8(a) & Hub zone certified, and all projects less than $100k.
- SBA gives an 80% guaranty for all other small business
- Like all bond programs, a contractor approaches an agent like Surety 1 to write through SBA or other.
- Firm must have 3 year average revenue of $14 million per year for specialty trades and $33.5 million for heavy construction
- Contract size cannot exceed $6.5 million for most contractors. Up to $10 million for federal project with certification.
- Maintenance period must be 2 years or less unless special consideration is given
- SBA has a .729% fee on all performance and payment bonds (1 charge for both). There is no fee for bid bonds.
- This fee is separate from the surety’s premium charge on bonds, which all companies must pay, regardless if in SBA or not.
Standard Application Process
- Contractor questionnaire, personal financial statement, 3 years of business financials, work in progress report, among other items.
- 912 form – Statement of personal history
- 994 form – application for a bond guaranty
SBA Quick Bond Guaranty Program
- For bonds under $250,000 that meet the below listed requirements. Meant to alleviate the cumbersome paperwork process
- Must have Liquidates Damages of $1,000/day or less
- Maintenance guaranty up to 2 years
- Work excludes environmental, demolition, and projects that have started
- Is not eligible to companies with previous claims or federal tax liens
How Do I Get Started?
The SBA program can be a great program but like all programs, there are pros and cons and each contractor has different needs. The process should be the same for all bonding needs: start with a consultation with a surety professional to see what type of bond program, SBA or other, best fits your needs. At Surety1, we only write bonds, all day every day. Call us now for a free consultation: 877-654-2327