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SBA Bond Guarantee Program: New Limits, New Directions

Recently approved legislation increases the U.S. Small Business Administration’s (SBA) Bond Guarantee Program from $2 million per single project to $6.5 million, and in some cases up to $10 million. The program had temporary increases up to $5 million during the American Recovery and Reinvestment Act, but this new legislation makes the increases permanent.

Prior to the increase in coverage, contractors were unable to use the SBA program for many small business set-asides, such as 8(a), HUBZone and service-disabled, when the bond requirement exceeded $2 million.  With the new limitations firmly in place, contractors throughout the country are poised to benefit greatly. In addition to the increase in coverage, the SBA has created a “Quick App” program for bonds up to $250,000. With some ownership information and history on the firms’ largest completed projects, the SBA can provide up to a 90 percent guarantee to a surety company. This works similarly to the credit-based programs seen in the standard market.

Historically, the surety industry has done a tremendous job of underwriting consistently and by maintaining a “common sense” approach when looking at an account or specific job. However, sureties are naturally conservative, and due to the recent economic conditions, they are even more hesitant to take on a “riskier” contractor with the fear that the account will fail. The increased threshold will help small, emerging and distressed contractors establish some level of bonding capacity.

Changes to the SBA bond threshold provide huge benefits to several types of contractors.

  • First-time bond users (e.g., new companies) want to establish a long-term bonding relationship, but may have a hard time finding a market that will consider them due to the fact they are so new. The SBA can consider companies that have just started or ones that are looking for their first bond. The Quick App program is a great place for a new company to start, as there is minimal underwriting information and the turnaround time is usually less than 48 hours.
  • Contractors previously declined by a standard surety may feel there aren’t any other options, but most of them qualify for bonds through the SBA Bond Guarantee Program. As an example, some contractors think that audited statements are required prior to considering a bond, or that it’s necessary to show 10 percent in working capital prior to getting a bond approved. Depending on the size of the project, the SBA can work with internal financial statements (e.g., Quickbooks and tax returns), as well as less than 10 percent working capital.
  • Contractors that want a larger bonding capacity can benefit from the SBA, especially with the limits increasing to $6.5 million. A small business that currently has a $4 million program in the standard market may qualify for $6 million or $8 million with SBA assistance. Due to the flexible underwriting guidelines, a contractor could qualify for a larger program.
  • “One-and-done” bond users may need a quick fix, but for some reason don’t qualify in the standard market.  The SBA Quick App provides a solution for contractors that may not be looking for a long-term relationship or that don’t frequently need bonds. The underwriting information required is minimal and the turnaround time is very fast.

Bond agents have seen contractors grow from bonding small projects at $50,000 to $2 million, but still struggle to get bonded for jobs exceeding that limit. With the SBA increasing its limits to $6.5 million, agents will be able to help small businesses secure bonds while they continue to improve their financial presentation, experience and overall company profile.

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