When to Transition a Contractor Out of the SBA Bond Guarantee Program

When to Transition a Contractor Out of the SBA Bond Program

As an insurance agent, you may have some contractor clients who secure their surety bonds through the Small Business Administration (SBA) Bond Program. This program is a popular launch pad for new contractors and a potential fallback for those who fall on hard times. However, it isn’t designed to be a permanent solution. 

Instead, participating contractors should strive to strengthen their financials and performance history so they can eventually qualify for bonds in the standard surety market. By understanding some key readiness signs, you can help your contractor clients transition out of the SBA Program and into standard markets at the ideal time. 

Keep reading to learn why contractors start out with the SBA, when they’re ready to move on, and how to guide them through the process with BOSS Bond’s support. 

Quick Refresher—Why Do Contractors Start With SBA?

There are many reasons why contractors participate in the SBA Program. The most common ones include:

• Just starting out – Many contractors don’t qualify for traditional surety bonds early on in their careers, whether it's due to limited financial history, thin working capital, or lingering credit issues. 
• Unexpected setbacks – Established contractors can also face financial setbacks that temporarily disqualify them from the standard surety market. As they get back on their feet, the SBA Program can serve as a bridge to keep projects moving as they rebuild their finances. 
• Job size – For some contractors, job size is also a factor. After all, some sureties aren’t comfortable backing a large bond request for a contractor without SBA support. Thus, the SBA Program can help contractors take on bigger projects earlier in their careers.

The SBA Program helps these types of contractors secure bonds by guaranteeing a portion of them with participating surety companies. While the SBA Program can unlock valuable opportunities, it also has some notable limitations.

For instance, contractors can only secure bonds of up to $9 million on non-federal projects and up to $14 million on federal projects. They must also pay SBA fees and navigate additional administrative paperwork. Finally, contractors’ annual revenues must remain below a certain threshold for them to qualify as a “small business,” indicating that it's time to transition to the standard market.

SBA vs. Standard Markets

3 Signs A Contractor is Ready for Standard Surety Markets

As an insurance agent, it’s important to know when your contractor clients are ready to move on to standard surety markets. By alerting them of their readiness, you can help them obtain better bonding terms, larger bonding capacities, and accelerated business growth. 

Here are three types of indicators that suggest a contractor is ready to join the standard market:

Financial indicators:

• Their seasonally-adjusted working capital and net worth are trending upward.
• They showcase consistent profitability, with clean financial statements to prove it.
• They have stable cash flow and access to an appropriate line of credit.

Operational indicators:

• They complete projects on time, on budget, and without any bond claims.
• They provide reliable WIP reports and track job costs accurately.
• Their backlog falls within their capacity.
• They have clear processes for billing, change orders, and subcontractor management.

Project profile indicators:

• Their average project size and complexity are increasing.
• They successfully manage multi-trade projects and coordinate with subcontractors.
• They have positive references from project owners and general contractors (GCs).
• Their safety experience modification rate (EMR) is at or below the industry average. 

If a contractor’s finances, operations, and projects all trend upward for 12 to 24 months, you can confidently explore standard surety prequalification with them.

Hard Constraints That Push a Transition

Sometimes, exiting the SBA Program isn’t optional. Some contractors simply outgrow the program’s eligibility and require standard market bonding solutions. For example, their:

• Job sizes, aggregates, or revenue may start exceeding SBA thresholds. 
• Project volume may reach a point where dealing with SBA fees and administrative requirements causes too much friction. 
• Project specialties fall outside the SBA’s scope.

Potential Pitfalls of Leaving the SBA Program Prematurely

While the SBA Program can hold some contractors back, leaving it too early can also pose problems. Here are some signs that a contractor still needs more time before making the transition:

• Seasonal or one-off “good years” – A single profitable season doesn’t guarantee a contractor’s ongoing stability. Instead, standard underwriters want to see sustained performance over time.
• Under-capitalization after growth – When a contractor expands their business rapidly or invests in costly equipment, it can deplete their working capital, leaving them with insufficient liquidity to satisfy standard sureties’ expectations.
• Incomplete financial presentation – If a contractor only provides partial interim statements, tax-basis reports without explanatory notes, or outdated WIP schedules, standard market underwriters may be reluctant to work with them. 

Rather than letting your contractor clients face these hurdles alone, you can reduce their risk by recommending a phased transition. This often involves securing dual prequalification with the SBA and standard surety companies.

Read More: The Importance of Prequalification in Public and Private Sector Construction Projects

6-Step Transition Plan For Insurance Agents

If you want to ensure a smooth transition for your contractor clients, just follow these six steps:

1. Prequalify your clients with BOSS Bonds’ contract bond team. There’s no obligation—just an honest assessment of their readiness.
2. Assemble a package of their year-end CPA statements and interims, WIP and backlog schedules, bank letters with LOC terms, AR/AP agings, resumes, references, and safety data.
3. Right-size their capacity by aligning their single and aggregate lines with their historical highs and cash flow.
4. Plan their indemnity by confirming that owners and their spouses are prepared to sign the agreement. Consider additional support, such as subordination agreements or standby letters of credit, when necessary.
5. Employ a phased implementation, starting the contractor out with mid-sized jobs in the standard market while keeping the SBA Program in place for edge cases.
6. Schedule quarterly check-ins to update your clients’ interim financials, WIP reports, and covenant compliance, and adjust their bond lines accordingly. 

Read More: Common Mistakes P&C Agents Make with Surety Bonds & How to Avoid Them

Hybrid Strategies That Can Ease the Transition

As we mentioned above, a phased transition can offer your contractor clients the most comprehensive risk management support. Here’s how you can employ this hybrid approach:

• Use the standard market for all of a contractor’s core work and keep the SBA Program as a fallback for certain projects. 
• Gradually raise the contractor’s single and aggregate limits as they build a stronger portfolio of completed jobs. 
• Align their bank line increases with their seasonal cash flow needs to prevent overextension. 

This strategic approach maintains contractors’ access to the SBA Program as they adjust to the standard market’s underwriting complexities and heightened reporting requirements.

Read More: 10 Tips for Increasing Your Bonding Capacity

Contractor Client Case Study

To see how this hybrid strategy plays out in practice, consider a contractor who started out with thin working capital and a limited financial history. At first, the SBA Program allowed them to qualify for small municipal projects, enabling them to get their business off the ground.

Over time, the contractor demonstrates strong project performance, clean project completions, and steady financial improvement. Within two years, they have two consecutive CPA-reviewed statements, consistent gross profits, and a newly secured line of credit with their bank.

These improvements signify that the contractor is ready to test the waters in the standard market. They secure their first traditional performance bond for a mid-sized project, while still maintaining SBA support for niche municipal jobs during the first year.

How to Discuss SBA Program Transitions With Owners and CFOs

As an insurance agent, you often serve as the bridge between your contractor clients and sureties. Thus, you need to be prepared to answer the following questions during conversations about SBA transitions:

• “Why now?” – Explain how the standard market can help clients lower costs, expedite approvals, expand their bonding capacity, and bolster their reputation among project owners and GCs. 
• “What is going to change?” – Outline the key differences between the SBA Program and standard markets, from more detailed underwriting to greater bond capacities.
• “How can we reduce risk during the transition?” – Highlight the benefits of taking a phased approach with realistic project limits and ongoing advisory support.

Test the Waters With BOSS Bonds

Are your contractor clients showing signs that they’re outgrowing the SBA Program? BOSS Bonds can help you evaluate their readiness.

Simply request a standard-market prequalification with our contract team. We can create a phased transition plan for your clients and keep the SBA Program as a safety net, if needed.

Reach out to BOSS Bonds today to learn more!

Key Takeaways

• The SBA Bond Program is a valuable launch pad for new or under-capitalized contractors looking to establish stronger financials and performance history. However, it’s not designed to be a long-term solution. 
• Once a contractor showcases steady financial strength, operational consistency, and project success for 12 to 24 months, it may be time for them to explore standard market prequalification. 
• Moving into the standard market allows contractors to take on larger contracts, expand their bond capacity past SBA limits, and eliminate the hassle of SBA fees and administrative delays. 
• Transitioning too soon can be risky, so it’s smart to take a phased approach where contractors use both SBA and standard markets as they get their bearings. Insurance agents play a valuable role in advising their contractor clients through this transition. 
• With our nationwide reach, market access, and expert support, BOSS Bonds can help position your contractor clients for long-term growth and bonding success.

Sources:

SBA. Surety bonds.

https://www.sba.gov/funding-programs/surety-bonds

ASSP. Experience Modification Rate as a Prequalification Criterion for Safety Performance.

https://aeasseincludes.assp.org/professionalsafety/pastissues/065/07/F2AlBayati_0720.pdf