A surety bond is a type of insurance that guarantees performance of a contract. An obligee (or business) seeks a principal (or contractor) to fulfill a contract. To insure the obligee a successful delivery, the principal buys a surety bond so the surety company becomes responsible for its obligations. If the principal defaults, the surety company can either find another principal to fulfill the contract or compensate the obligee’s financial losses. In other words, the surety assures a successful contract because it assumes all financial obligations if the principal does not deliver. There are three types of surety bonds: Bid Bonds which guarantee that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract; Payment bonds which guarantee that suppliers and subcontractors will be paid for work performed under the contract; and Performance Bonds which guarantee that the contractor will perform the contract in accordance with its terms and conditions. Any Federal Construction contract valued at $100,000 or more requires a surety bond as a condition of contract award. Most State and municipal governments have similar requirements, as well as private entities. Many service contracts, and occasionally, supply contracts, also require surety bonds. The SBA does not issue surety bonds directly, but does work with agents to provide a guarantee for bid, performance, and payment bonds issued by participating surety companies.
To be eligible for a surety bond guarantee, your business must fall within the size standards set by SBA and be unable to obtain a bond without an SBA guarantee. The credit and character evaluations of the company’s Principal must support issuance of a bond guaranteed by the SBA. The contract must require a bond to be eligible and the size of the contract or subcontract cannot exceed $2 million.