In finance, a surety bond involves a promise by one party to assume all responsibility for a debt obligation of a borrower if that borrower was to default.
Usually, a surety bond is a promise by a guarantor to pay one party a certain amount of money if the second party (principal) fails to meet their obligations, such as fulfilling the repayment terms of their contract.
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This helps to protect the obligee against any losses they may face should the principal fail to meet the terms stated. The person or company providing this promise of payment is commonly known as a guarantor or ‘surety’.
What Are SBA Surety Bonds?
When it comes to small businesses, surety bonds can help businesses to win contracts by providing the customer with a guarantee that the work will be completed.
You will find that many public and private contracts now require surety bonds as standard, all of which are offered by surety companies. The Small Business Administration (SBA) then guarantees surety bonds for these surety companies, allowing the companies to offer further help to small businesses that may not meet the criteria that are required for other sureties. Depending on the requirements and criteria you meet, the company offering your surety bonds may differ slightly.
While the SBA does not issue construction surety bonds, they share the risk with bonding companies and in most cases, they assume 80% of the bond liability. In rarer cases, the SBA will guarantee 90%. Although this isn’t often, it tends to be standard for contractors who have obtained a Disabled Veteran Business Enterprise (DVBE) designation.
How Do They Work?
As mentioned above, the SBA’s Surety Bond Program is designed to provide a guarantee to surety companies, with them paying up to 90% of losses incurred. The reduced liability for surety companies allows for them to offer bongs to contractors that ordinarily do not meet the criteria.
In order to qualify for a contractor surety bond, contractors must provide professional information to the surety company, demonstrating their ability to complete the contract as planned. The information provided will vary depending on the industry they’re in, the size of the contact and work that needs to be done. If a contractor does not meet the requirements needed to complete a contract and obtain approval, that is where the SBA surety bond programme will be applied.
Who Is Pinnacle Surety And How Can We Help?
Surety bonds are not issued through the SBA, but instead through surety agents (also known as producers). These agents are typically appointed with several different surety bond carriers, giving them extensive knowledge of bond requirements and allowing them to align the correct requests or bond programs with the most suitable markets.
We, here at Pinnacle, are an example of a surety agent.
Founded in 1994, we are a professional surety bond agency committed to long term successful relationships with both our clients and our surety companies.
As winners on the 2020 Leaderboard of the Merchants Bonding Company, we are recognized as an elite surety agent that is currently demonstrating the commitment and desire to grow with a long-term partnership with Merchants.
Many agents are not familiar with all of the “ins and outs” of the SBA program and as a result, you could be missing out on many of the program’s additional benefits. As the SBA Surety Bond Experts, you can be sure you’re getting the most out of the program with Pinnacle.
What Are Some Of The Benefits Of Small Business Administration (SBA) Surety Bonds?
- When it comes to SBA backed surety bonds, there are lots of benefits they can provide to you as a contractor. For example:
- If you have an SBA partner with sureties to help guarantee your bond, the surety agency is likely to be much more willing to approve.
- If your project runs to a federal agency, SBA will bond projects as large as 6.5 million dollars single or up to 10 million dollars.
- SBA backed surety bonds can give you roughly twice as much bond credit as a non-SBA backed bond program.
- SBA isn’t exclusive, which means if you’re new to construction or you’re an experienced contractor who needs a higher bond limit, SBA is for you.
- If needed, SBA also allows for flexibility in financial reporting and accepts non CPA produced financial statements.
- Are There Are Disadvantages?
- SBA will take a contractors business and liquid personal assets into consideration when assessing the criteria needed.
- SBA will bond up to two times your largest completed contract, with no limits on your aggregate program so long as you qualify for the program.
- SBA charges a small fee of .6%, which does not include the overall surety premium.
- You are also required by SBA to have a clean criminal record in order to qualify, which means you can’t have any felonies on your record. Contractor’s who have been convicted of a felony can still qualify, but they must petition for acceptance into the program.
- There are strict reporting requirements designed by the SBA to ensure that they have the most up to date credit and financial information for your business on record. These reports must be given to SBA in a timely manner, otherwise, you may find your bond is delayed or denied.
- The SBA bond request forms can be difficult and there is definitely a learning curve to navigating them. An experienced agent, much like the ones here at Pinnacle, can help to streamline this process.
- You may also find that SBA typically requires more lead time for approval than a typical surety. If you’re unsure on timings, contractors should make requests for bonding as soon as possible to ensure timely receipt of the bonds.
For more information when it comes to SBA Surety Bonds, you can get in touch with a member of our team or visit the rest of the Pinnacle website here. Our friendly team will be able to use their expertise to answer any questions you may have.