The Small Business Administration bond program can be a great way for contractors to expand their bonding capacity, but whether it’s the right move for your business is a question mark. As with any program, there are advantages and disadvantages to applying for them. This, of course, depends on the contractor considering applying for the SBA bond program.
Before rushing to an SBA application, let’s go over the pros and cons so that you can make an informed decision for your business.
What is the SBA Surety Bond Program?
The Small Business Administration created the Surety Bond Guarantee Program in 1971 to help small business contractors bid on government contracts by making it easier to qualify for the required bonds. The program accomplished this by aligning with surety companies and giving them guarantees against possible losses, giving the surety providers more flexibility with underwriting, and allowing them to go beyond the normal bonding limits.
To learn more about the SBA bond program and how it helps better your bonding capacity, we encourage you to read the article linked below:
How the SBA Bond Program Can Increase Your Bonding Capacity – CSBA
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SBA Bond Program Cons
It’s always better to know the cons before focusing on the benefits of any decision, that way you approach the choice with the potential downsides clearly in mind. Below are the disadvantages of the SBA bond program:
- The SBA has its own fee of 0.6% of the bond amount on top of the premium charged for the bond by the surety company. Though additional costs are typically not ideal, the greater bonding capacity and profit opportunities that arise from it, may make the extra charge worth it.
- Every time a contractor needs a bond through the SBA, they’ll need to fill out an extra form. Most of the information is prefilled from the first time, but the specific information of the job is required to be updated.
Depending on which of the plans under the SBA bond program is used, there can be limitations. For example, the SBA generally limits bonding jobs more than 1.5 times the contractor‘s largest project completed, or when bonding annual indefinite quantity contracts, the contract must be renewable by mutual agreement. For this reason, it’s important for a contractor to work with a surety agent who is well experienced in the SBA bond program. With a qualified agent, the contractor can discuss their goals and the agent can ensure the contractor is in the right program to better achieve them. The SBA Bond Guarantee has many exceptions to rules, and for that reason, it can appear as a complex.
SBA Bonding Program Pros
There are several advantages of applying to the SBA bond program that can greatly help contractors both seasoned and newer in business:
- The SBA bond program usually provides double the bonding capacity that a standard surety company will. This is primarily due to the more lenient underwriting terms that are geared towards helping contractors grow their companies.
- The SBA can write single bonds up to $6.5 million and technically have no limit on the total amount of bonds that they can provide at once. While there is a cap on the single job size ($6.5 million), they can issue as many bonds as they’d like per contractor.
- The SBA gives contractors a lot of room for growth, for example, a general building and civil engineering contractor can have an average revenue of up to $39.5 million while trade contractors can have up to $16.5 million average revenue.
- If working with a surety agent that is well-versed in the SBA bond program, their experienced service and responsiveness are equal to that of standard surety providers. An experienced surety expert will be able to guide a contractor through either plan used in the SBA:
- Plan A: The surety agents go directly to the SBA for underwriting and the surety provider signs off. In this SBA plan, there are very specific guidelines that must be followed which is why an experienced surety agent is necessary.
- Plan B: The surety itself does the underwriting, where they have more discretion.
SBA Application Guidance
surety expert can greatly help contractors navigate the process. We at CSBA are experienced in guiding California contractors, both newer and seasoned professionals, through the program and taking advantage of the growth it can produce. Due to both our background and understanding, we are able to do the heavy lifting and ensure the best outcome if you choose the SBA bond program to help grow your bonding capacity.
If you’re weighing the advantages and disadvantages of the program, don’t hesitate to reach out to us to help you decide if it’s the right choice for your business.
Get a surety
bond quote now
We want to know more about how we can help your construction company get the right contractor bond for your next project.