When a small business contractor prepares to take on a larger project, they must be able to provide surety bonds that will essentially pay if the job is not completed properly and on time. Thus, they are meant to provide a source of insurance for the customer, but provide financial insurance for the contractor themselves. The Small Business Administration (SBA) also offers these types of surety bonds, known as the Surety Bond Guarantee Program (SBG) that is especially focused on small business contractors who may not be able to obtain surety bonds through regular commercial channels.
What is a Surety Bond?
A surety bond is a three-party instrument between a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor and a project owner. While the contractor is bound to comply with the terms and conditions of the contract, they may not be able to complete it for a variety of reasons. The surety will then assume the contractor’s responsibilities and make sure that the project is completed. At the same time, it also provides protection to the contractor, because they can point to the contractual obligations of the project owner for any disputes regarding the completion schedule and other issues.
So how does the SBA play a role? For small business contractors, the costs of a surety may be prohibitive. Using the SBG program, the SBA makes an agreement with a surety guaranteeing that the SBA will assume a percentage of the loss in the event that the contractor should breach the contract and the surety is invoked.
Why is this important? For small contracting businesses to be able to grow, they need to be able to take on larger jobs, often with the need for a surety. By making those sureties available, the SBA is giving these businesses a chance to grow over time. The SBA guarantee gives sureties an incentive to provide bonding for these smaller businesses. Eligible contractors find their ability to access bonding strengthened and their access to contracting opportunities will grow.
So how large can these surety bonds be? The SBA indicates that it can guarantee bonds for various contracts up to $5 million, which would cover the bid, performance and payment bonds. Depending on the situation, they may be willing to go up as high as $10 million, but these are only in very specific instances.
Investing with the Venture Capital Program
When it comes to finding growth capital, small business owners may not necessarily have the ability to find those investors who can provide the funding for their business to take the next big growth spurt. Using the SBA’s Small Business Investment Company Program (SBIC), small businesses can take advantage of a public-private investment partnership that was originally created to assist in filling the gap between the availability of growth capital and the needs of a small business looking to grow.
Similar to loans and the surety bonds, the SBA does not actually invest directly in the small businesses, but they rely on the expertise of qualified private investment funds. The SBA basically licenses these private investment funds as SBICs and supplements their capital with access to low-cost, government-guaranteed debt. Essentially, now the funds are in the position of applying the necessary capital to businesses in need.
Unlike investment funds that are only looking for the highest return on their investment, SBICs limit their investment choices to qualified small business concerns as defined by the SBA and their regulations. That means that these SBICs are searching across the U.S. for promising businesses that need debt or equity types of financing.
In many ways, it gives smaller businesses the opportunity to access funds that may have otherwise not been available to them due to their smaller size. Although the SBICs do mimic investment funds in terms of how they primarily operate, the reality is that high returns play a secondary role to meeting the SBA regulations for these funds.
As you can see, the SBA provides at least two different options that can support the growth of a small business by providing capital or a way to access additional capital by means of a surety that will allow them to access higher paying contracts. Yet the government backing of these options makes them attractive to lenders as well, because the risk is lessened for them as the government takes on some of the risk.
Depending on the size of your business, these are just two of the options that might be available to fund your growth.
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