Frequently Asked Questions
What is a Surety Bond?
Is a Bond anything like Insurance?
Who benefits from a Bond?
How can Small, Minority, Women and Veteran Owned Businesses benefit from Surety Bonds?
What types of Bonds are there?
How is a Surety Bond underwritten?
What is indemnity?
What happens when a claim is made against my Bond?
How much do Bonds cost?
How do I obtain an SBA Surety Bond Guarantee?
What types of businesses are eligible for the SBA Surety Bond Guarantee Program?
Does the SBA issue Bonds?
Does the SBA require any special forms?
What size contracts are eligible for the SBA Surety Bond Guarantee Program?
How much does it cost to obtain an SBA Surety Bond Guarantee?
What is a Surety Bond?
A bond is a three-way agreement between the Surety, the Principal (who is the contractor or applicant) and the Obligee. Obligee is a technical word for a beneficiary, who might be the project owner, government agency, etc. The Surety is the party standing behind the performance of the Principal. The Surety has evaluated the Principal’s ability and willingness to perform and is providing their stamp of approval with a bond. If the Principal is unable to satisfy the terms of their agreement, the Surety assumes the responsibility and reimburses the Obligee.
Is a Bond anything like insurance?
Bonds are considered a specialty form of insurance, and the Surety is almost always an insurance company. Bonds are very different than insurance, however because the beneficiary is a third party. As long as the Principal does what is promised, the Surety will not be called upon to perform or pay. The Principal is the primary responsible party under the bond, and must agree to reimburse the Surety for any claims or expenses they incurred because the Principal has not lived up to their agreement.
Who benefits from a Bond?
The Obligee is the main beneficiary under the bond, but the Principal benefits too. If the Principal cannot or will not perform, the Surety steps in and makes good on the Principal’s obligation. The Obligee also has an obligation under the bond however. If the Obligee fails to fulfill their responsibilities under the contract or agreement, neither the Principal or Surety has any liability.
How can Small, Minority, Woman and Veteran Owned Businesses benefit from Surety Bonds?
Bonds provide small contractors with numerous benefits. The surety bond provides protection against contractor default. The surety company helps the contractor avoid costly delays and contract disputes, by intervening before it’s too late. When a project is bonded, there’s also an added layer of payment protection for workers and suppliers of the contractor. Surety bonds help level the playing field, and allow a small contractor to compete in the free market, leading to lucrative contracting opportunities.
What types of Bonds are there?
Bonds can be required either by law or contract. Bonds can be divided into the following broad categories: Contract, Commercial, Court and Fidelity.
Contract Bonds can be required by statute or by private agreement. Some examples would include:
- Bid Bonds guarantee the bidder’s promise to enter into a contract in the event their bid is accepted.
- Performance Bonds can be required for construction, supply or service contracts, and guarantee the principal will perform in accordance with the terms and conditions of the contract, purchase order, or service agreement.
- Payment Bonds are usually paired with Performance Bonds, and are required to guarantee that all suppliers and laborers on a bonded project will be paid.
Commercial Bonds are generally required by statute, and guarantee some aspect of the Principal’s operation. Some examples would include:
- Auctioneer Bonds – compliance with the applicable state laws and regulations, and is for the protection of any buyer or consignor against misconduct of the Auctioneer or Trading Assistant.
- DMEPOS Medicare Bonds – guarantees that Suppliers of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) will fulfill their obligation to Medicare.
- Motor Vehicle Dealer – compliance with state laws and regulations, payment of tax, and in some cases, payment of judgments
- Union Welfare Bonds guarantee the contractor will stay current with their union dues, wage and fringe benefit payments.
- Tax Bonds are required by government entities and guarantee that the principal will pay their taxes in accordance with the governing law.
Court Bonds can be required of either party in a lawsuit, and guarantee the principal will pay any settlement or damages the court awards against them. Some examples would include:
- Administrator Bonds – guarantees the faithful discharge of duties and accounting of a decedent’s estate in accordance with the law and orders of the court.
- Appeal Bonds – guarantees prosecution of appeal and payment of judgment, including interest, court costs and attorney’s fees
- Foreclosure Bonds – guarantees faithful performance of duty for sale of property in foreclosure
- Mechanic’s Lien Bonds – guarantees that a mechanic’s lien filed against a property will be discharged and released.
Fidelity Bonds protect the employer from dishonest acts committed by their employees. Some examples include:
- Janitorial Services Bonds provide protection for customers of cleaning businesses. Employees are easy targets for blame when something is missing since they have access to customers’ assets, equipment, supplies and personal belongings.
- Employee Dishonesty Bonds guarantee that the bonded employee(s) will handle their employer’s money and property with trustworthiness. Small companies can be especially hard hit because they can’t afford extensive safeguards and do not have the financial capacity to absorb the losses.
- Pension Trust (ERISA) Bonds are required by The Pension Reform Act of 1974, which states that the fiduciaries of a pension or profit sharing fund are required to post a bond for 10% of the amount of funds handled. Pension plans and profit sharing programs are managed by appointed individuals known as plan fiduciaries.
How is a Surety Bond underwritten?
Surety Companies will evaluate financial information, detailed credit history of the business and it’s principal owners, along with management’s experience. Based on the Surety Company’s expert decision making ability, they will not only be able to assess a Principal’s ability to pay or perform an agreement, but the Surety will be able to determine the Principal’s willingness to fulfill their promise.
What is indemnity?
The indemnity agreement is the legal document that fully discloses the Principal’s obligations in a surety relationship, and allows the Surety the right to recover any losses paid out on behalf of a Principal. The Principal is the primary responsible party under the bond, and must agree to reimburse the Surety for any claims or expenses they incurred because the Principal has not lived up to their agreement.
What happens if a claim is filed against my Bond?
The Surety’s claim department will conduct an investigation as quickly as possible to avoid any further damages and mitigate their exposure. It is important to note as the Principal under a bond, that a pending claim does not necessarily mean there will be a financial loss incurred since the dispute may not even be legitimate. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee, and implement collection proceedings against the Principal.
How much do Bonds cost?
Generally speaking, contract and commercial bonds can cost between .5% and 3% of the contract price or bond amount, depending on the surety’s assessment of the risk involved. The cost of fidelity bonds usually depends on the number of employees covered.
How do I obtain an SBA Surety Bond Guarantee?
SBA’s contractual relationship as it pertains to the guarantee, is directly with the Surety Company or its agent. It is the Surety who issues the bond to a small contractor. Therefore, a small contractor must first find an agent or Surety Company. Surety Bond Associates is a preferred agent participating in the SBA Surety Bond Guarantee Program.
Once the Surety Company receives the completed forms and sufficient information from the applicant, it processes and underwrites the application. The Surety Company decides whether to execute the bond with or without the SBA’s guarantee.
What types of businesses are eligible for the SBA Surety Bond Guarantee Program?
Generally, all small businesses in the construction, manufacturing and service industries, whether they are sole-proprietorships, partnerships, or corporations are eligible to participate in SBA’s surety bond guarantee, provided the business has attempted and failed to obtain the required bond(s) in the standard surety market.
Does the SBA issue Bonds?
No, SBA does not issue bonds. However, SBA does provide a guarantee for bid, performance, and payment bonds issued by participating Surety Companies.
Does the SBA require any special forms?
Yes, in addition to the standard underwriting forms required by a Surety Company, the SBA also requires the contractor to complete the following:
Form 912 Statement of Personal History
This form must be completed by a proprietor; each partner; and each officer, stockholder or director holding 20% or more voting stock in a corporation; and any other person having the authority to bind the assets of the business. Download Form 912 (PDF).
Form 994 Contractor Application for Surety Bond Guarantee Assistance
This form asks specific questions about the contractor’s business size, type, ability to obtain surety bonds, minority status, and relationship to the SBA. Download Form 994 (PDF).
What size contracts are eligible for the SBA Surety Bond Guarantee Program?
Individual contracts of $6,500,000 or less are eligible for SBA’s Surety Bond Guarantee. There is no limit to the number of bonds that can be guaranteed for any one contractor.
How much does it cost to obtain an SBA Surety Bond Guarantee?
The SBA charges contractors a processing fee of .729% of the contract price on all bonds requiring a guarantee, except bids bonds. This fee is in addition to any amounts charged by the Surety Company, which can range between 1% to 3% of the contract price. The processing fee is required when the application is submitted, and is refunded in the event the bond is not issued or is returned for cancellation.