The Small Business Administration (SBA) has been providing assistance to small businesses since 1953 by providing credit and allowing them to grow while contributing to the economy. The SBA’s Surety Bond Guarantee program has recently increased bonding capacity while lowering the barrier for entry for small businesses to obtain surety bonds for construction and manufacturing contracts. There are several factors to consider when applying for a surety bond, and the SBA program can be a useful tool to provide surety bond credit and grow your business.
While the SBA does have some limits and restrictions when considering issuing surety bonds, they are able to support contractors on relatively large projects with reasonable underwriting considerations. The single bond limits as of the date of this article are as follows:
- $250,000 for Quick App – 2 page application with fast-tracked approval process
- $6.5 million single bond for any owner/obligee (City, State, General Contractor, etc.)
- $10 million single bond for Prime Federal Contracts
The SBA does require that a business be a “small business”, which is generally based on a firm’s revenues averaged out over three years. For contractors, their general limitations are:
- $7.5 million for landscapers
- $15 million for specialty trades such as electrical, plumbing, etc.
- $36.5 million for heavy construction such as road and bridge builders
You can use the SBA’s Size Standards Tool to determine if you are a small contractor.
There are other special considerations for Veteran and Service Disabled Veteran owned firms, minority owned firms, and 8(a) and certified HubZone participants.
As any regular bond user can attest, financial statements are still critical to obtaining surety bonds. In many cases, an internally prepared statement by the contractor will suffice. The SBA is able to accept a variety of financial statements to consider different levels of support.
- Bonds up to $500,000 – Quality Internal Financial Statement
- Bonds up to $1 million – CPA Compilation
- Bonds up to $6.5 million – CPA Review
Determining what size bonds your firm qualifies for involves a detailed analysis of your financial condition and job experience. The SBA will generally qualify a firm for single bonds that are 20 times its analyzed working capital, defined as current assets less current liabilities. An important distinction for the SBA is that they will allow unused balances of available credit lines as a current asset.
The SBA provides a surety bond guarantee by guaranteeing the risk assumed by a standard surety company. Thus, a firm will obtain bonds written by a standard surety company while a percentage of that risk is guaranteed by the SBA. For this guarantee, the SBA charges a fee to both the firm obtaining the bonds, and the surety company issuing the bonds. As of this date, the fee charged by the SBA to the company obtaining the bond is 0.729% of the contract price, while the premium charged by the surety varies by surety company and bond size, though it is usually around 1.5% and 2.5%.
Whatever your bond needs may be, the SBA can be a powerful tool to expanding your surety bond credit and business opportunities. Understanding the process and having a knowledgeable partner to navigate this process is critical to success. We encourage you to contact us for more information to find out how we can help.