Construction industry groups say they welcome the Obama administration’s plans announced on March 16 to free up credit markets for small businesses by temporarily increasing federal guarantees on Small Business Administration (SBA) loans to 90%, eliminating fees on 7(a) and 504 loan applications and purchasing securities backed by those loans.

But they say an even more beneficial change for construction firms is the less-heralded expansion of SBA’s surety bond program. As part of the administration’s Financial Stability Plan announced by Treasury Secretary Timothy Geithner in February, the maximum amount for construction contracts that qualify for SBAguaranteed surety bonds is being raised from $2 million to $5 million. The limit can be extended to contracts up to $10 million if an agency feels doing so will increase small-business participation.

“Raising limits on surety bonds is big,” says Colette Nelson, executive vice president of the American Subcontractors Association. “With all the construction coming out of the stimulus bill, a lot of contractors that have never done public-sector work before will be able to get surety bonds and compete for those projects.”

GEITHNER

Industry officials do not object to the Treasury secretary’s plan to thaw the frozen credit market for small businesses by purchasing securities backed by Small Business Administration loans. But they say they will be helped more by a less-publicized plan announced in February to make it easier for firms to obtain surety bonds.

Marco Giamberardino, senior director of the Associated General Contractors’ Federal and Heavy Construction Division, says the surety expansion also protects the government and contracting community.

“The government is assured that the contractor has the necessary resources to complete the project,” he says. “It’s important for firms to prove that they are credit-worthy.”

Companies that provide surety bonds are equally pleased with the expansion, particularly since it also includes changes to the rules governing their participation in the program.

“Up to now, the rules have been pretty draconian,” says Mark McCallum, general counsel and director of government relations for the National Association of Surety Bond Producers. “Mere technical violations would predicate a complete denial of the claim. Now, administrators have more latitude to waive certain issues and preserve the entire guarantee to the surety.”

Robert Duke, director of underwriting and assistant counsel for the Surety and Fidelity Administration of America, believes these changes alone won’t be sufficient to have a noticeable effect on the construction economy. However, combined with other steps to break the credit logjam, “They are very positive because they allow more firms to participate and give greater certainty to the bonding process,” says Duke.