As a small company, your firm may find it impossible to compete for contracts awarded by government agencies or public utilities because they always require a surety bond. The Maryland Small Business Development Financing Authority can help you get the performance bonding insurance you need.
MSBDFA, a part of the Maryland Department of Economic & Employment Development, has a number of programs to assist companies that are 70-percent owned by minorities or by "economically disadvantaged" persons. The Surety Bond Guaranty Program is the only MSBDFA program which does not require minority ownership. Minorities include blacks, Hispanics, women and the handicapped. The executive director of MSBDFA, Stanley W. Tucker, or the surety bond guaranty specialist, Timothy Smoot, may be contacted in Baltimore at (301) 333-4270.
A surety bond is an agreement by an insurer, known as the bonding company, to guarantee your firm's ability to perform all of the requirements for a contract. If you can not complete the job, the bonding company must pay for someone else to do it.
Parameters: MSBDFA's program is restricted to contracts with federal, state or local governments or public utilities, but they do not have to be Maryland-based government agencies or utilities.
To even bid on a government contract, you are usually required to have a surety bond. Locally, USF&G; and the Fidelity & Deposit Co. are two large insurers that issue bonds. Depending on the size of your firm and your background, the insurer may be concerned about your ability to complete the contract work. To achieve the financial strength you may need in the eyes of the insurer, MSBDFA can issue a bond guarantee.
Suppose the Maryland Department of Transportation issues a "request for proposals" to design and reconstruct a major highway intersection. Your firm intends to submit a proposal, but since your company is small, the government agency is concerned that you can not fulfill the required work for the contract. This concern revolves around the company's financial strength and/or limited experience with similar projects. A MSBDFA guarantee supports your effort to obtain the bond you need to compete for the contract.
To start the process, identify the contract and its bonding requirements. Next contact an independent bonding agent -- some of them are listed in the Yellow Pages -- who will submit your bonding application to the insurer. If the bonding company rejects your application, the agent should then seek the insurer's written agreement to go forward with the state's backing. The agent then submits to MSBDFA a project data sheet which explains the details of the project.
Eligibility: To qualify you must be registered with the State of Maryland to conduct business in this state. Your main business location must be in Maryland or you must be a Maryland resident. The company must have fewer than 50 employees or have sales that total less than $10 million. In addition, a bonding ,, company must have rejected your request for a surety bond within the 90 days prior to submission of your application to MSBDFA. No more than 75 percent of the contract can be passed on to subcontractors from your firm.
Approval: In the approval process, the state looks at such things as your reputation and ability to properly manage your finances. You must show the economic impact that your ability to perform the contract will have on the state. This could include increased employment or additional dollars that would come into the state through your company.
MSBDFA can guarantee up to 90 percent of the surety bond. The guarantee means the state will reimburse the insurer for losses incurred should your company fail to perform as agreed under your contract with the government agency or public utility. The limit to the guarantee is $1 million and is in effect for the entire term of the bond. Most of the applicants request guarantees of about $500,000 based on the average contract size.
It is possible to have a surety-bond-guaranty line of credit. The state would pre-approve a number of bonds where the basic terms and conditions are already determined. This is possible if you expect a number of proposals that are similar in nature, such as contracts for a series of highway exits.
Applicants for surety bond guarantees can get a quicker response from MSBDFA than those applying for other types of financing. The applications for other MSBDFA programs are reviewed at the monthly meeting of MSBDFA's advisory board. But surety-bond applicants need speedy handling due to the nature of the contract proposal process. The applications for bond guarantees are reviewed by a special subcommittee in between the regular monthly meetings.
Fees: This program is not free -- you and the insurance company both pay a fee to MSBDFA. The insurance company must pay 20 percent of the total premium and your company must pay 1/2 percent of the total bond amount. Keep in mind that you must also pay for the surety bond premium. Unlike many other forms of insurance, the full amount of the premium is owed at the beginning.
Collateral: The bonding company will require some type of collateral before the work is started. Collateral could include the assignment of the government- or utility-contract payments to the bonding company. MSBDFA may require additional collateral such as machinery, inventory, real estate, government securities or the "cash surrender value" of your life insurance.
The bottom line: With the Surety Bond Guaranty Program and the other MSBDFA programs, small companies can get a needed shot in the arm to help achieve financial stability.
Patrick Rossello, president of The Business Consulting Group, belongs to a number of local advisory boards such as the Baltimore Technology Development Center.