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 South Dakota, surety bonds are contractual agreements involving a principal, a surety, and an obligee. They are commonly required by law across various industries to ensure that the principal complies with the terms of the bond, which often includes the completion of a contract or adherence to regulations. Surety bonds are particularly important for small businesses in securing contracts by providing a guarantee to customers. The Small Business Administration (SBA) offers a Surety Bond Program that helps small businesses obtain these bonds by guaranteeing bonds issued by participating surety companies. To qualify for an SBA-guaranteed bond, a business must meet the SBA's size standards, have a contract within specified monetary limits, and satisfy the surety's criteria for credit, capacity, and character. The SBA charges a fee of 0.6% of the contract price for guarantees on performance and payment bonds, which is refundable under certain conditions, while bid bond guarantees are free of charge. South Dakota businesses can locate SBA-approved surety agencies through the SBA's online database, enabling them to find the necessary support for obtaining surety bonds.