Small businesses apply for surety bonds through a surety company or agent, which they locate through independent research or the Small Business Administration, according to the SBA. The surety company underwrites the application, considering such factors as the businesses' capital, capacity and character of the principles. Many small businesses are ineligible for surety bonds unless the bonds are guaranteed by the SBA. In those cases, the surety company forwards the application to the SBA for approval.Continue Reading
A surety bond is a guarantee to the customer that the project is properly completed, the SBA explains. They include bid bonds, payment bonds and performance bonds. A bid bond guarantees the bidder is able to purchase payment and performance bonds if awarded the contract. A payment bond insures suppliers and subcontractors are paid. A performance bond guarantees project completion.
In considering an application, underwriters analyze the company's liquidity and cash flow and judge if they are sufficient for the project, the SBA notes. They also look at bank balances and debt levels. In addition, underwriters consider past performance on projects, question if the project has been fully understood, and review the capabilities and character of management and owners.
To be eligible for the SBA surety-bond guarantee program, a small business is required to be ineligible in absence of the guarantee, be bidding on a contract valued at less than $2 million, be independently owned and operated and qualify as a small business according to federal standards, explains the SBA.Learn more about Managing a Business