The Small Business Administration (SBA) is a necessary piece to the surety puzzle for many contractors. The SBA has the ability to guarantee surety bonds, which can be misunderstood. I’m frequently asked questions about these SBA Guaranteed Bonds – What Does the SBA have to do with surety bonds?, How do SBA Bonds work? and Do I qualify? In this article I will cut through the legalese and examine the answers to these questions.
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What does the SBA have to do with surety bonds?

The SBA is a helpful tool for small businesses to obtain surety credit for bid bonds, performance bonds and payment bonds.

How do SBA Bonds work?

The contractor can only obtain an SBA guarantee through a participating agency.
The SBA does not write bonds, they guarantee bonds between 70% and 90% with one of their participating sureties. Because the surety company is taking only a 10% to 30% risk, they are more likely to approve bonds that they would normally pass on. That’s why many businesses turn to SBA guaranteed bonds. However, the surety may still decline the bonds even with the SBA guarantee.

Check the SBA list of participating agencies for one that fits your needs. Further more, ask that agency about their SBA experience. Make sure they are the right partner for you.

The contractor must not be bondable for standard surety credit.

This creates a series of complications which I will try to simplify with an example. Let’s say I have a client that qualifies for $500,000 projects through a standard surety. They want to bid on a $1,000,000 project, but are declined or the surety company asks for collateral for funds control. Then they should apply for a SBA guaranteed bond.

Do I qualify?

The contractor’s revenue must qualify.

For general contractors, heavy construction and civil construction, the contractor and all affiliates must average $36,500,000 or less over the last three years. Specialty contractors must average $15,000,000 or less.

If the contractor is a qualified small business, there must be a specific project the contractor wants to bid on.
The project must be $6,500,000 or less or $10,000,000 or less, if a federal contracting officer certifies that SBA’s guarantee is necessary for the small business to obtain bonding. The number of bonds the SBA will guarantee for a contractor is unlimited.

The Contractor must provide the agent with detailed information.
Picture of a pen on a stock chart.
If the contractor and project fall under the above parameters, then they must provide the agent with the standard underwriting information along with the SBA Form 994 (Application for Surety Bond Guarantee Assistance), SBA Form 912 (Statement of Personal History), and SBA Form 994F (Schedule of Work in Process).

The SBA will underwrite the contractor, but their focus will be on working capital.
Working capital is defined as current assets minus current liabilities, even if there is negative equity. The SBA will factor in availability of a line of credit or rely on a job specific line of credit to approve the guarantee. The SBA may also choose not to provide a guarantee based on their underwriting.

Is the SBA hard to work with?

If you are working with an agent familiar with the process, it will be seamless. Contractors will see a slight increase in paperwork for the initial application and a minimal amount going forward. The SBA has become streamlined in recent years. For my first SBA submission, I overnighted all the paperwork to their office. Now, I can complete everything online. Contractors can make online payments for the SBA fee for final bonds. Same day approvals are becoming the norm.

The SBA can be a valuable partner for a new contractor, a contractor who had a bad project or is just looking to expand. Take advantage of the SBA and their certified surety companies to get the project that seems out of reach. The SBA’s goal is to help contractors obtain more projects so they can graduate from the program.

To get started with the SBA guaranteed bond process contact Shorewest Surety.

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