What is the SBA Surety Bond Guarantee Program?
The SBA Surety Bond Guarantee Program, authorized by Congress as part of the Small Business Investment Act of 1958, provides financial guarantees to small business owners that purchase bonds through participating surety bond providers.
Surety bonds are agreements between an obligee and a contractor or subcontractor to guarantee their agreement/obligations under certain conditions including project completion, worker payment for services rendered, performance on contracts, and compliance with federal state laws.
The program is intended to encourage bonding companies to make available bonds where they might not otherwise be because of perceived risk. This helps ensure contractors are able to obtain suitable surety coverage at affordable rates. This ultimately saves taxpayer dollars by reducing tax revenue lost due to unpaid payroll taxes associated with uninsured workers i.e. workers paid “under the table”.
What are SBA surety bonds?
An SBA-provided surety bond is one provided for your small business by bonding companies registered with the Small Business Administration, guaranteeing performance according to government standards.
These bonds are a mandate for federal agencies and contracts, but the SBA provides a list of other situations where bonds may also be required or recommended.
SBA surety bonds guarantee that you will meet certain requirements – determined by the obligee within a specific amount of time. In addition to complying with specifications set by your company’s contract, these may include things like making timely payments to subcontractors. If you fail to adhere to any term or condition of the contract or specification, then the government agency requiring the bond can file a final demand against it.
Your failure to comply will result in an initial penalty and then interest charges until such time as all obligations have been satisfied and costs associated with the collection have been covered by the principal.
How does it work?
An SBA surety bond is a three-party agreement between you, your company, and an insurance company that backs your promise to fulfill your contractual obligations. You sign a contract to perform work or deliver materials in exchange for payment from a government agency, private corporation, or individual person.
In turn, you purchase a surety bond from an insurance carrier that requires them to pay third parties if you fail on your promise to complete your projects as contracted. If this happens, the guarantor will pay the third party directly. This arrangement provides you with a financial safety net when work is slow, cash flow is low and you need to make payroll for your business or employees.
Who can participate?
The contracting company will ask for an insurance bond to make sure that they will perform their obligations as agreed upon by all parties. The benefit of having a surety bond is that it can guarantee significant financial resources to make good on their promises if they could not deliver what is in the contract.
For example, when a contractor gets into business with another party and promises to build something but they do not have enough capital in order to complete their task, then they need an SBA surety bond in order for them to get funds from the insurer in order to complete the work that is required.
The person or party asking for a surety bond can be anyone who has entered into an agreement with one or several parties that requires them to provide assurance regarding their ability to carry out their responsibilities. They need not own any property or have any real assets which will serve as collateral, only the guarantee of the company with which they are entering into the business will do.
There are also certain limitations on who can get bonded so it is important to ask if you are eligible before applying for one. This measure ensures since there are consequences should they default on their promise, they will want to avoid doing so at all costs.
What are the benefits of using this program?
A surety bond is a contract where one party promises to pay the other party under specific conditions. The first part of the contract is between the principal, who agrees to perform any act or duty required by law or contractual obligation, and the obligee, who requires that this act be performed in order for both parties to gain from the transaction.
This agreement is enforced by a third-party guarantor known as the surety. By signing these contracts/agreements, both parties agree that if they default on their end of the bargain the principal defaults on their obligation and the obligee fail to uphold his, they will reimburse each other for any losses incurred through full repayment of money or performance of specific acts.
SBA surety bonds offer greater flexibility than other types of bonds because they’re not tied to one industry or function, which allows them to be used in many different ways. They can even be used to secure government contracts and loans, as well as commercial transactions such as leases, sales agreements, and conditional sales contracts.