SBA Boosts Surety Bond Guarantee to $5 Million for Small Businesses

Small business owners who work on projects requiring surety bonds have received a boost from the federal government.

The Small Business Administration can now guarantee bonds on contracts up to $5 million for small businesses that otherwise struggled to obtain surety bonds through traditional channels. This temporary increase – a full $3 million higher than the previous limit – will remain in place through September 2010.

There are even special cases where the SBA will guarantee all surety bond types on contracts valued up to $10 million, provided the contracting officer certifies that the guarantee is in the best interests of the government.

These temporary increases are aimed at helping spur recovery in the construction and service industries. Because of their size, small businesses are at times at a competitive disadvantage when competing for government contracts. These expanded guarantees provide an additional layer of financial security for both smaller firms and project owners – the SBA reimburses anywhere from 70 to 90 percent of the costs incurred if a contractor defaults.

“Raising the surety bond limit is a critical step in making sure small businesses in the construction and service sector have access to federal contracting opportunities that will help drive economic recovery,” SBA Administrator Karen Mills said in a news release. “These changes support small and emerging businesses nationwide, particularly construction contractors who have seen their markets hurt by a poor economy and lagging construction.”

Surety bonds are basically three-party agreements that guarantee a project will be completed. They also provide financial protection for project owners in the event of default or some other debilitating development. The SBA’s guarantee covers four types of common contract bonds:

Bid Bond – guarantees the bidder will enter into the contract and provide payment and performance bonds.
Payment Bond – guarantees the contractor will pay all laborers and suppliers.
Performance Bond – guarantees the contractor will follow contract and all applicable terms and regulations
Ancillary Bond – bonds that are incidental and essential to the performance of the contract.

Entrepreneurs interested in utilizing the program must qualify as a small business within their industry, as defined by the North American Industry Classification System (NAICS) Code. They will also have to meet the financial requirements of an individual surety company – the SBA does not issue bonds.

Contractors will have to provide financial documentation and credit histories when applying for a surety bond. Consumers can see a list of participating surety companies and agents here.

Bond costs vary depending on an applicant’s financial status and the individual surety. Contractors will be on the hook for a bond premium. The SBA also charges the applicant a fee of $7.29 per $1,000 dollars of the contract amount.