Like insurance, a surety bond protects your business. However, unlike insurance companies that require cash or security over your company’s assets, surety providers only require a minimal amount of working capital and cash flow to cover their risk. This makes them much easier to obtain than other contracts, such as performance bonds required for public subdivision construction projects. This is especially true for small businesses with credit concerns or new startups.
It Provides a Form of Credit
The SBA’s guarantee gives surety companies the confidence to write contract bonds for new and emerging contractors. It reduces their risk by allowing them to cover up to 90% of the liability for certain losses. To qualify for a bond, underwriters must be confident that you run a profitable business, pay your bills, and meet other financial obligations. They use a variety of indicators to determine your capacity, including revenue, net worth, and liquidity.
If you’re a contractor with limited experience, it can be challenging to get the necessary bonding for larger jobs (about $350K+). This is why many start with smaller projects and build a relationship with their surety company. You can start bidding on larger jobs once you have a solid history and track record. These bonds provide credit and guarantee that you’ll complete the project according to the contract terms. You’ll also be covered for claims caused by faulty work or default.
It Gives You a Competitive Edge
Bonds are often required by the client/principal of your contract to secure them against you not performing the work as outlined in the agreement. They also serve as an added level of security in your bid to win projects. Unlike bank guarantees, which typically require cash or security over your business assets, the SBG program offers a flexible facility that does not tie up your working capital and relies on an indemnity from you as the Contractor. This allows you to maximize your capacity and reduces the risk to your business. The Small Business Administration’s (SBA) Surety Bond Guarantee Program is a key tool for small contractors to secure more contracts. It enables them to use bonds instead of collateral. It provides an alternative to non-standard contract programs that may include funds control and security requirements, which are deal-breakers for many growing companies. The SBA-backed bonds are also more cost-effective than the standard premium charged for a bond, and there is no ‘non-utilization fee,’ so you only pay for the bonds that are issued.
It Protects You from Losses
Contractors must meet certain standards to qualify for a surety bond. This includes character, capacity, and the ability to complete the project. To prove this, contractors must show the surety company that they have sufficient assets, lines of credit, cash reserves and other financial resources to cover the cost of a project if they default. Many types of surety bonds are used for different purposes. Bid bonds screen out unqualified bidders for contracts with the obligee (the party requiring the bond). Performance and payment bonds safeguard the project owner by ensuring that the contract will be completed according to the terms outlined in the agreement. They also protect against mechanic’s liens on the work.
Other kinds of bonds include license and permit bonds that guarantee the holder will comply with laws or regulations. Court, fiduciary, and specialty bonds are designed to address unique business needs. For example, the SBA Quick Program allows qualified small businesses to easily qualify for a surety bond without submitting CPA-reviewed financial statements.
It Allows You to Bid on More Projects
A surety bond guarantees that a project will be completed if you default. There are four types of bonds: bid bonds ensure you enter contracts; payment bonds provide contractors pay suppliers and subcontractors for labor and materials; performance bonds guarantee that projects will be completed according to contract terms; and ancillary bonds cover other aspects of the contract. Getting a bond is challenging for some smaller or newer companies. A standard surety company looks at working capital (current assets minus current liabilities) to underwrite contract bonds, so many small contractors may need help qualifying. The SBA offers a program that helps small and emerging contractors get bonding capacity by considering bank line of credit availability, working capital, and net worth. This makes it easier for small and emerging contractors to qualify for the large contracts they need to grow their business. Check with your agent for more details.