A surety bond is a contract between three parties—(1) the principal (the contractor or service provider); (2) the surety (the company guaranteeing or insuring payment or performance); and (3) the obligee (the entity requiring the bond)—in which the surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond.

Surety bonds can be required by law in many industries and professions, such as construction, freight brokerage, insurance brokerage, auto dealership, tax preparation, and others—depending on the laws in your state.

Surety bonds help small businesses win contracts by providing the customer with a guarantee that the work will be completed. Many public and private contracts require surety bonds, which are offered by surety companies.

The federal government’s Small Business Administration (SBA) guarantees surety bonds for certain surety companies, which allows the companies to offer surety bonds to small businesses that might not meet the criteria for other sureties.

How the SBA Surety Bond Program Works

• Surety Bonds are Requested—Some contracts require that the business doing the work be properly bonded.

• Surety Partners with Business—Authorized surety companies provide surety bonds to businesses that meet their qualifications.

• SBA Guarantees Bonds—The SBA guarantees surety bonds for private surety companies, so more small businesses can qualify.

• Small Businesses Benefit—Small businesses get SBA-guaranteed surety bonds so they can get to work.

The Right Surety Bond for the Project

Some contracts require surety bonds that cover specific situations. The SBA guarantees surety bonds that cover several major categories of work. These bonds include:

• Bid Bonds—Ensure full payment and performance bonding from the contract bidder.

• Payment Bonds— Ensure full payment to the suppliers and subcontractors.

• Performance Bonds—Ensure full completion of the contract by the small business.

• Ancillary Bonds—Ensure completion of requirements outside of performance or payment, such as maintenance.

Eligibility

For your small business to be eligible to obtain an SBA-guaranteed surety bond, your business must:

• Be a small business—Your business must qualify as a small business according to the SBA’s size standards. Most manufacturing companies with 500 employees or fewer, and most non-manufacturing businesses with average annual receipts under $7.5 million will qualify as a small business.

• Have a small contract—Up to $6.5 million for non-federal contracts and up to $10 million for federal contracts.

• Pass evaluation—Meet the surety company’s credit, capacity, and character requirements.

Bond Guarantee Fee

All performance and payment bond guarantees require small businesses to pay the SBA a fee of .6% of the contract price. If for some reason the bond is cancelled or not issued, the SBA will return the guarantee fee. The SBA does not charge a fee for bid bond guarantees.

Find a Surety Bond Agency in Your State

To find a surety bond agency in your state that offers SBA-guaranteed bonds, see the database on the SBA website at https://www.sba.gov/funding-programs/surety-bonds.

In Pennsylvania (PA), surety bonds act as a three-party agreement involving the principal (contractor or service provider), the surety (insurer), and the obligee (entity requiring the bond). These bonds are often mandated by law across various industries, including construction and auto dealerships, to ensure contractual obligations are met. The Small Business Administration (SBA) offers a Surety Bond Guarantee Program that helps small businesses obtain bonds by guaranteeing bonds issued by participating surety companies. To be eligible for an SBA-guaranteed bond in PA, a small business must meet the SBA's size standards, have a contract within the stipulated financial limits, and satisfy the surety company's criteria. The SBA charges a fee of 0.6% of the contract price for performance and payment bond guarantees, refundable if the bond is not issued. Types of bonds guaranteed by the SBA include bid bonds, payment bonds, performance bonds, and ancillary bonds. Small businesses in PA can find SBA-approved surety bond agencies through the SBA's online database.