Surety Bonding
How to Obtain a Bond
SBA Bond Guarantee Program
The SBA (Small Business Administration) has a Surety Bond Guarantee Program that offers assistance to contractors to obtain bonds. The goal of this program is to enable a company to obtain a bond with reasonable terms and conditions, even though the company does not qualify for the bond in a standard surety market. The Surety company and SBA work together to facilitate this process.
Currently, the SBA will guarantee a bond for up to $2 million. These amounts are subject to change at any time.
The Application Process:
- Complete the required number of SBA forms (which may vary from company to company). Forms usually required are a completed Contractor's Questionnaire, Work in Progress Schedule, Personal Financial Statement, Bank Reference Letter, Company Financial Statements, Application, Bond Guarantee Agreement and a General Indemnity Agreement. Additional documents may be requested by the SBA upon receipt of an application.
- A copy of any Contract, Award Letter, Bid Specs, etc. Details of the project are required on an SBA form.
- Evidence of Discharge of any past bankruptcy.
- Copy of payment agreements with the IRS or other government agencies regarding outstanding and unpaid taxes.
These documents are then forwarded to a surety agent and, upon completion, entered into the SBA online system. Once a decision has been reached, this information is forwarded to the Surety Company and the client. If approved, the appropriate bonds are issued.
The fee for the SBA Bond program is required to be paid in advance of a bond being issued (no fee required for Bid Bonds). The SBA fee is $7.29 per $1,000 of contract price (or 0.729%). As an example, if a bond is issued for $500,000, the fee to the SBA is $3,645. There is still an additional fee to the Surety company, which is typically reduced since a fee has been paid to the SBA.
Up to a certain amount (bond size), the SBA does not require CPA Financial Statements. The general rule is as follows:
- The SBA will accept internally prepared, quality financial statements (as an example, from QuickBooks) for projects that are less than $500,000.
- For contracts ranging in size from $500,000 to $1million, a CPA statement is required, but does not have to be prepared on an "audit" or "review" basis. A compilation is acceptable.
- For contracts that are more than $1million, a year-end CPA statement is required to be a review; however, any mid-year or interim statements may be done on a compilation basis.