The Small Business Administration (SBA) Surety Bond Guarantee Program began in 1971. It’s designed to increase small businesses’ access to federal, state, and local government contracting, as well as to private-sector contracting, by guaranteeing bid, performance, payment, and specified ancillary bonds. The program primarily serves contractors that cannot obtain bonding through traditional commercial channels, such as small and emerging contractors and those new in business.
The program guarantees individual contracts of up to $6.5 million and may consider up to $10 million for federal contracts if a federal contracting officer certifies that such a guarantee is necessary. Periodically, the $6.5 million limit is adjusted for inflation. The SBA’s guarantee currently ranges from 80% to 90% of the surety’s loss if a default occurs.
In FY2018, the SBA guaranteed 10,800 bid and final surety bonds with a total contract value of nearly $6.5 billion. While total industry information is difficult to ascertain, estimates based on the total amount of premiums collected by the private sector in recent years suggest the SBA’s Surety Bond Guarantee Program represents only 3% – 6% of the total value of all bonds issued in the marketplace.
When the Surety Bond Guarantee Program began in 1971, the agency offered one plan, the Prior Approval Program (Plan A). At its inception, Plan A required every surety bond application be reviewed by one of only two SBA offices. The process proved to be rather onerous on all participants, requiring significant paperwork and processing time. Today, Plan A is significantly more streamlined. It includes approximately 30 participating sureties and operates more efficiently than during its early years.
In the 1980s, based upon feedback from the industry, including multiple standard sureties, the SBA, in conjunction with the U.S. Congress, authorized the creation of the Preferred Surety Bond Guarantee (Plan B). Plan B permits “preferred sureties,” meaning those that meet specific criteria, to issue SBA guaranteed surety bonds. To be approved to participate, sureties must demonstrate specific underwriting and administrative standards, and must agree to periodic review and audits of SBA bonds. In exchange for assuming the underwriting and decision making, participating sureties accept a 70% guarantee against losses (compared to the 80%-90% guarantee offered by Plan A).
Below are the most basic requirements of small businesses to participate in the SBA programs.
Additionally, according to the Code of Federal Regulations (CFR)[i], applicants must “possess good character and reputation” as demonstrated by (1) not being under indictment, being convicted of a felony, or having a final civil judgment stating that the applicant has committed a breach of trust or has violated a law or regulation protecting the integrity of business transactions or business relationships; (2) not having a regulatory authority revoke, cancel, or suspend a license held by the applicant, which is necessary to perform the contract; and (3) never having obtained a bond guarantee by fraud or material misrepresentation.
Other eligibility standards include:
While the SBA Surety Bond Guarantee program has experienced growth in recent years, it is still an under-utilized government program. The government funding allocated to the program in recent years has far exceeded the total value of guaranteed bonds. Due in part to efforts to streamlining the application process, reducing paperwork, and improving response times, the program continues to become more relevant and utilized.
The SBA bond guarantee program is a viable option for more contractors than may be understood, even by those in the industry. It’s also a valuable option for agents to have in their toolbox. It is a useful option to assist contractors, whether they’re just starting their business, or facing a challenging situation.
This article should not be considered legal advice by Liberty Mutual in any way. The statements contained here are merely the Company’s perspective on the SBA Surety Bond Guarantee Program.
[i] Code of Federal Regulations. Specifically, 13 C.F.R. §115.13(a)(2).
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