SBA Guarantee

The SBA reimburses a participating surety (within specified limits) for the losses incurred as a result of a contractor's default on a guaranteed bid bond, payment bond, performance bond, or any bond that is ancillary. Activity is accomplished through the Prior Approval Program or the Preferred Surety Bond (PSB) Program.

Under the Prior Approval Program, the agent reviews the application package and recommends it to the surety company for approval. If the surety company agrees to issue a bond with the SBA guarantee, the package is forwarded to the appropriate SBA/SBG Area Office and evaluated by SBG personnel. If the applicant is determined to be qualified and approval is reasonable in light of the risk, the SBA may issue a guarantee to the surety company. The surety then issues the bond to the contractor. SBA's guarantee agreement is with the surety company not with the small business contractor.

Any surety company certified by the U.S. Treasury to issue bonds may apply for participation in the Prior Approval Program, but its bonds are subject to SBA's prior review and approval. Contractors bonded under this program are generally smaller and less experienced than those bonded under the Preferred Surety Bond (PSB) Program. To compensate surety companies for the risk associated with bonding Prior Approval contractors, SBA guarantees 90 percent of the losses incurred on bonds up to $100,000 and to bonds to socially and economically disadvantaged contractors; it also guarantees 80 percent of the losses incurred on all other bonds under this program.

The Preferred Surety Bond (PSB) Program was established by P.L. 100-590 in November of 1988. The PSB Program provides a 70 percent guarantee to participating sureties, but in exchange, prior SBA approval for each bond is not required. Under this program, the SBA gives selected sureties the authority to issue, monitor, and service bonds without prior approval. Each participating company has a guarantee limit with the SBA. The PSB Program was created to encourage larger surety companies to expand their efforts to help small businesses obtain bonds. Sureties participating in this program cannot participate in the Prior Approval Program.

Fourteen major sureties have become participants in the PSB Program. PSB surety companies serve more experienced contractors that demonstrate the potential for growth and have consistently performed more active work programs. PSB sureties expect the contractors to graduate from the program in approximately three years. This program is managed by SBA's Office of Surety Guarantees in Washington, DC. Current authority for the program will expire on September 30, 2003.

The following major factors guide, but do not limit, SBA's selection process of sureties to participate in the PSB Program:

A PSB surety must have an underwriting limitation of at least $2,000,000, as determined by the U.S. Treasury Department Circular 570, or "T-list," of acceptable sureties.

Rates charged by a PSB surety are to be no greater then the Surety Association of America's (SAA) advisory premium rates in effect on August 1, 1987.

The premium income from contract bonds guaranteed by the SBA and any other government agency shall not exceed one-quarter of its total contract bond premium income.

Underwriting authority for SBA guaranteed bonds is vested only in employees of the surety.

Final settlement authority for claims and recovery under PSB is vested only in employees of the surety's permanent claims department.

The rating or ranking assigned to the surety by a recognized authority .

The PSB surety shall execute a Preferred Surety Bond Guarantee Agreement with the SBA .

Interested surety companies should send a letter formally requesting participation in the program to Robert J. Moffitt, Associate Administrator, Office of Surety Guarantees, U.S. Small Business Administration, Suite 8600, 409 Third Street, SW, Washington, D.C., 20416.

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