Surety bond guarantees going unused

The U.S. Small Business Administration wants to help small business contractors who have struggled to obtain bonds since the 2001 terrorist attacks and the most recent recession.

A byproduct of the economic downturn was a decrease in the number of companies willing to underwrite surety bonds, policies that contractors obtain to ensure clients they'll finish a job.

Surety bonds can be guaranteed through the government, but the guarantee program offered by the SBA since 1971 hasn't been aggressively marketed until this year.

The SBA informed its district directors last year that goals would be set for each district on the number of guarantees to be provided to contractors.

"This was a way of trying to re-energize the program," said Pamela Sapia, acting district director for the 55-county San Antonio district.

The San Antonio district was told to provide 127 guarantees, a figure based in part on U.S. Census Bureau figures.

The fiscal year ends today, but only 46 guarantees were provided. While that's well short of the goal, Sapia said only 13 contractors made use of the program in the previous fiscal year.

Surety bonds are often required of contractors to ensure they will enter into a contract if they bid, perform the work according to specifications, and pay their subcontractors. They are needed on most commercial construction and government public works projects.

The program lets small minority- and women-owned contractor businesses get bonding capacity at a level they could not obtain in the regular bonding market. The SBA guarantees up to 90 percent of a project, leaving the bond company with only 10 percent of the risk.

Jim Swindle, a surety bond agent who runs Alamo Surety Bonds in San Antonio, is president of the Surety Association of South Texas. He sympathizes with the district's unmet expectations, but he doesn't think their bosses in Washington should expect better.

"You have to have a bond company that will participate," Swindle said. "The number of those companies has greatly dwindled in the last couple of years."

The surety bond market in Texas took a tumble in 2001 when Amwest Surety Insurance, one of the largest firms, went into liquidation for writing a large volume of business using lax underwriting standards, Swindle said.

"Then Sept. 11 happened and the reinsurance market collapsed," he said. "The reinsurance company is the bonding company's insurance. Before 9-11, there were 20 major companies; now it's only a dozen."

Steve Nelson, president of Austin-based Suretec Insurance Co., said most small contractors are doing well enough that they don't need to go to the SBA for a guarantee.

Business Financial Services

Surety bond guarantees going unused