Representative Bobby Rush (D-IL) recently presented a bill named HR 2424 which would make some changes to the U.S. Small Business Administration Bond Guarantee Program; it would boost the maximum of the contract amount under the SBA Program from $2 million to $5 million and would permit guarantees of up to $10 million in certain cases. The changes in this bill are basically identical to the amendments that Senator Ben Cardin (D-MD) proposed in the economic stimulus package that Congress enacted in 2009 but those have since expired. Small business owners need to be encouraged to take advantage of the SBA Bond Program but these changes aren’t the best way to go about that.

The proposed changes to the SBA Bond Guarantee program essentially allows SBA bonded contractors to either do larger or a larger volume of jobs. While these modifications sound good for small contractors, they shouldn’t be top priority when it comes to getting small contractors aboard the SBA Bond Program. The main reason many contractors and surety companies don’t work with the SBA Bond Program is because it’s difficult to do so; it needs a procedural face-lift. The costs of running the SBA Bond Program are more than double the amount of revenue brought in by the program year after year. The Bond Program is mismanaged which steers sureties away and ends up limiting the surety market quite a bit leaving contractors with few options. There’s also a lot of red tape involved when trying to become bonded through the SBA which automatically drives the small contractors and sureties away.

The amount of money being lost and the lack of participation by contractors make it obvious that changes must be made to the SBA Bond Program; but legislators need to refocus their efforts. The efficiency of the operation needs an upgrade before anything else. Until the effectiveness of the program becomes the main concern, we will continue to see sureties and contractors sidestepping this program that’s intended to provide more opportunities for small businesses.

See: Disadvantaged Business Enterprise American Recovery and Reinvestment Act Bonding Assistance Reimbursable Fee Program (DBE ARRA BAP)

“This new program, which will be administered by the Department of Transportation’s Office of Small and Disadvantaged Business Utilization (OSDBU), allows small and disadvantaged businesses to apply to be reimbursed for bonding premiums and fees incurred when competing for, or performing on, transportation infrastructure projects funded by ARRA. The program will be especially helpful for businesses with traditionally less working capital than larger contractors.”

The headline sure catches the eye, but how realistic is it? According to the site, only “small and disadvantaged businesses” can apply. When you read further down, it seems that they classify these businesses by their low working capital; one of the main items looked at when reviewing a contractor’s surety capacity.

Fortunately, it does allow the SBA bonded contractors to apply. However, SBA contractors’ bond lines are often reduced due to their lines of credit being reduced or terminated (SBA counts LOCs as working capital).

In other words, the government is willing to provide stimulus funds to refund contractors’ bond premiums, but only for contractors that don’t actually qualify for surety bonding.

Technically, the ceiling is still at $5 million (see: SBA FAQ). The changes allow up to $10 million only when “the contracting officer certifies that the guarantee is in the best interests of the government”. However, most news agencies are reporting it as a flat increase.

The SBA surety program is quite paper intensive as is. Certainly, there will be more paperwork to show the contracting officer agrees that it is in the best interests of the government.

One of the main differences in underwriting using the SBA program is how they calculate working capital. Under the SBA program a bank line of credit is considered working capital, which is not the case with normal surety underwriting. This allows contractors to qualify for bond lines that are larger than they could obtain through traditional avenues. Unfortunately, the credit crunch has caused banks to reduce or close line of credits previously available to contractors. Such changes to our financial system have had a direct impact on bond lines provided through the SBA program.

This leaves me to wonder, would there be more benefit in reviewing the current SBA procedures rather than increasing the maximum bond amount? Sure, it wouldn’t look as good in the news headlines, but it might have more of an impact with the contractors they are trying to assist.