Handbook / Business insurance

Surety bonds for small businesses: types, costs and SBA guarantees

If you bid on government work, larger construction projects or some licensed trades, you may be asked for a surety bond. Bonds can open the door to bigger contracts, but they work very differently from insurance, and it is important to understand what you are promising.

What a surety bond is

A surety bond involves three parties:

• the principal: your business, which must meet an obligation
• the obligee: the customer or government agency requiring the bond
• the surety: the company that guarantees you will meet the obligation

The SBA explains that surety bonds help small businesses win contracts by giving the customer a guarantee that the work will be completed, and that many public and private contracts require them.

Bonds are not insurance

Insurance protects you against losses. A bond protects the obligee. If you fail to meet the obligation and the surety pays a claim, the surety will normally expect you to repay it, often under an indemnity agreement you sign when you get the bond. Read that agreement carefully. You still need insurance; see general liability insurance.

Contract bonds and commercial bonds

The SBA describes two broad groups:

• Contract bonds ensure the terms of a specific contract are fulfilled.
• Commercial bonds ensure applicable laws and regulations are followed. Government agencies require certain companies or individuals to obtain them, and they protect the public against things like fraud.

Commercial bonds are often tied to licenses, such as some contractor licenses, and to certain public officials, such as notaries in states that require a notary bond.

Types of contract bonds

The SBA lists these categories:

• Bid bonds: support your bid by guaranteeing that, if you win, you will provide the payment and performance bonds required.
• Payment bonds: ensure suppliers and subcontractors are paid.
• Performance bonds: ensure you complete the contract.
• Ancillary bonds: cover requirements outside performance or payment, such as maintenance.

How sureties decide

Before issuing a bond, a surety assesses whether you can complete the work and pay your obligations. Expect questions about:

• your financial statements and cash position
• your work history and experience with similar projects
• your current workload
• your credit
• your bank relationships

Good bookkeeping and up-to-date financial statements make bonding easier.

What bonds cost

Bond premiums are usually a percentage of the bond amount, set by the surety based on the bond type and your risk profile. Shop around through surety agents, and remember to build bond costs into your bids.

SBA surety bond guarantees

The SBA guarantees bid, performance, payment and ancillary bonds issued by certain surety companies. This lets those companies offer bonds to small businesses that might not meet their normal criteria. The process the SBA describes:

1. A small business contacts an SBA-authorised surety agency.
2. The agent secures bond approval from an SBA surety partner.
3. The SBA guarantees the bond for a qualified small business.

The SBA charges a guarantee fee on performance and payment bond guarantees, which it states as 0.6% of the contract price, and no fee for bid bond guarantees. The SBA guarantees contract bonds but not commercial bonds. Check eligibility and current terms on the SBA's surety bonds page.

Managing bonds

• keep copies of all bond documents and indemnity agreements
• track expiry and renewal dates for license bonds
• tell your surety about problems on bonded jobs early
• complete projects and pay subcontractors on time to protect your bonding record

Bonds, insurance and certificates

Customers may ask for both a bond and proof of insurance. A certificate of insurance shows your insurance; a bond is a separate document from the surety.

Getting bonded for the first time

If you have never been bonded, start before you need a bond for a specific bid. Talk to a surety agent, prepare financial statements and a list of completed projects, and ask what bonding capacity you could get. Starting with smaller bonded jobs builds a track record that makes larger bonds easier later.

Questions to ask a surety agent

• which bond types and amounts I can qualify for now
• what financial information you need
• how premiums are set
• what the indemnity agreement requires

A surety bond guarantees your obligations to the customer or agency, not to you; know whether you need a contract or commercial bond, prepare clean financials, price bonds into bids, understand the indemnity you sign, and ask SBA-authorised agents about guaranteed bonds if you struggle to get bonded.