What is Small Business Size Standards Adjustment of Alternative Size Standard for SBA’s 7(a) and CDC/504 Loan Program for inflation and Surety Bond Limit Adjustment for Inflation?

The Small Business Size Standards Adjustment of Alternative Size Standard for SBA’s 7(a) and CDC/504 Loan Program for inflation and Surety Bond Limit Adjustment for Inflation is a proposed rule by the U.S. Small Business Administration to amend its Small Business Size Regulations. The proposed rule aims to increase the alternative size standard for SBA’s 7(a) Business and Certified Development Company (CDC/504) Loan Programs by 34.46% to account for inflation that has occurred since the size standard’s establishment in 2010. The inflation adjustment would increase the size standard’s level for tangible net worth to $20 million and for net income to $6.5 million. Additionally, the proposed rule would adjust for inflation the applicable statutory limits for contract size under the Surety Bond Guarantee (SBG) Program. The adjustment would increase the contract limit to $9 million and to $14 million for Federal contracts if a Federal contracting officer certifies that such a guarantee is necessary.

 

Background for Small Business Standards

The U.S. Small Business Administration (SBA) establishes small business size definitions, also known as “size standards,” for private sector industries in the United States to determine eligibility for federal small business assistance. SBA uses two primary measures of business size for size standards purposes: average annual receipts over the last five years and average number of employees over the last 24 months. In addition, SBA’s Small Business Investment Company (SBIC), Certified Development Company (CDC/504), and 7(a) Loan Programs use either the industry-based size standards or tangible net worth and net income-based alternative size standards to determine eligibility for those programs.

Background for Surety Bond Contract Limits

The Surety Bond Guarantee (SBG) Program is designed to increase small business’ access to Federal, state, and local government contracting, as well as private-sector contracting, by guaranteeing bid, payment, and performance bonds on contracts for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA is amending the contract limits applicable to its SBG Program to adjust for inflation. The proposed adjustment would increase the contract limit to $9 million and to $14 million for Federal contracts if a Federal contracting officer certifies that such a guarantee is necessary.

 

What is a surety bond instrument?

A surety bond is a three-party agreement between a surety, a contractor, and a project owner. The agreement binds the contractor to comply with the contract’s terms and conditions. If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed. The surety bonds reduce the risk of contracting. Surety bonds are viewed as a means to encourage project owners to contract with small businesses that may not have the credit history or prior experience of larger businesses and are considered to be at greater risk of failing to comply with the contract’s terms and conditions.

 

What is Analysis of Business Loan Data?

The only electronic data on the size of small business applicants approved for loans through the SBA Business Loan Programs available for review is the number of employees and the NAICS industry. In an effort to estimate the percentage of loans that were approved under the statutory alternative size standard, SBA examined its electronic internal data on its Business Loan Programs for fiscal years 2021–2022. During fiscal years 2021–2022, a total of 118,424 loans were issued.

 

What metrics did the SBA use to estimate receipts, tangible net worth, net worth, and net income?

The SBA utilized four financial ratios from RMA for years 2019–2021: (1) Net Sales/Total Assets; (2) Net Fixed Assets/Tangible Net Worth; (3) Net Sales/Net Fixed Assets; and (4) Profit Before Taxes/Tangible Net Worth. These ratios were combined with receipts to estimate tangible net worth and net income for recipients to the SBA Business Loan Programs. The employment level of each SBA business loan recipient was converted to receipts using the receipts-to-employees ratios from the special tabulations of the 2017 Economic Census, 2017 Agricultural Census, and 2017 County Business Patterns.

 

Summary of Comparing Industry -Based Size Standards with Statutory Alternatives Size Standard

The statutory alternative size standard provides more benefits to applicants in the receipts-based industries as compared to employee-based industries. For the vast majority of industries in sectors such as Mining, Utilities, and Manufacturing which mostly have employee-based size standards, the industry-based size standards are relatively higher than the statutory alternative size standard. On the other hand, for industries in sectors with receipts-based size standards, such as Agriculture, Retail Trade, Professional and Administrative Support Services, Education Services, Health Care, Accommodation and Food Services, and Other Services, the statutory alternative size standard is relatively higher than the industry-based size standards.

 

Why Comparing Industry Based Size Standards with Statutory Alternatives Sizes Standards is important?

Comparing industry-based size standards with statutory alternative size standards is important because it helps to determine the eligibility of small businesses for SBA loans. The SBA uses size standards to determine whether a business qualifies as a small business and is eligible for SBA loans. The industry-based size standards are based on the average number of employees or average annual receipts of businesses in a particular industry, while the statutory alternative size standards are based on tangible net worth and net income. By comparing the two, the SBA can determine which standard is more appropriate for a particular industry and adjust the size standards accordingly. This helps to ensure that small businesses in different industries have equal access to SBA loans and that the size standards are fair and appropriate for each industry.

 

Summary of Advance Notice Proposed Rulemaking (ANPRM)

The Advance Notice of Proposed Rulemaking (ANPRM) is a process used by the SBA to gather public input and suggestions on establishing a permanent alternative size standard for its 7(a) and CDC/504 Loan Programs. The ANPRM was published in the Federal Register in March 2018, and it sought public input on sources of relevant data and information that SBA should evaluate in developing a permanent alternative size standard and in assessing its impact. The ANPRM also invited suggestions on how to simplify and streamline the loan application process for SBA lenders. The feedback received from the ANPRM was used to develop a proposed rule that seeks to adopt the interim statutory alternative size standard as the permanent alternative size standard for SBA’s Business Loan Programs.

 

Why is Advance Notice Proposed Rulemaking (ANPRM) important?

Advance Notice of Proposed Rulemaking (ANPRM) is important because it helps to understand the process used by the SBA to gather public input and suggestions on establishing a permanent alternative size standard for its 7(a) and CDC/504 Loan Programs. The ANPRM sought public input on sources of relevant data and information that SBA should evaluate in developing a permanent alternative size standard and in assessing its impact. The feedback received from the ANPRM was used to develop a proposed rule that seeks to adopt the interim statutory alternative size standard as the permanent alternative size standard for SBA’s Business Loan Programs. Understanding the ANPRM process is important because it helps to ensure that small businesses in different industries have equal access to SBA loans and that the size standards are fair and appropriate for each industry.

 

Summary of Appropriateness of Interim Statutory Alternative Size Standard as the Permanent Alternative Size Standard

The Appropriateness of Interim Statutory Alternative Size Standard as the Permanent Alternative Size Standard is a proposed rule by the SBA that seeks to adopt the interim statutory alternative size standard as the permanent alternative size standard for its 7(a) and CDC/504 Loan Programs. The interim statutory alternative size standard is $15 million in tangible net worth and $5 million in net income, and it has been in effect since 2010. The proposed rule seeks public input on adopting the interim statutory size standard as the permanent alternative size standard. The commenters to the ANPRM maintained that the statutory alternative size standard has enabled applicants that would not have otherwise qualified under the industry-based size standards to receive SBA’s financing. The commenters stated that the statutory alternative size standard has also benefited the SBA lenders in terms of simplifying and streamlining the loan application process. The analytical results presented in the previous sections support using the statutory alternative size standard as a permanent alternative size standard, subject to adjustment for inflation that has occurred since the establishment of the statutory alternative size standard in 2010.

 

Why is Appropriateness of Interim Statutory Alternative Size Standard as the Permanent Alternative Size Standard important?

The Appropriateness of Interim Statutory Alternative Size Standard as the Permanent Alternative Size Standard is important because it seeks to establish a permanent alternative size standard for SBA’s 7(a) and CDC/504 Loan Programs. The interim statutory alternative size standard has been in effect since 2010, and it has enabled applicants that would not have otherwise qualified under the industry-based size standards to receive SBA financing. The proposed rule seeks public input on adopting the interim statutory size standard as the permanent alternative size standard, subject to adjustment for inflation that has occurred since the establishment of the statutory alternative size standard in 2010. Establishing a permanent alternative size standard will simplify and streamline the loan application process for SBA lenders and ensure that small businesses in different industries have equal access to SBA loans.

 

Summary of inflation adjustment of statutory alternative size standard

The inflation adjustment of the statutory alternative size standard is a proposed rule by the SBA that seeks to adjust the interim statutory alternative size standard for inflation. The interim statutory alternative size standard is $15 million in tangible net worth and $5 million in net income, and it has been in effect since 2010. Inflation, as measured by the change in GDP price index, has increased more than 34% since 2010, which has eroded the value of the statutory alternative size standard in real terms. The proposed rule seeks to adopt the statutory alternative size standard as the permanent alternative size standard, subject to inflation adjustment. The SBA has used the inflation adjustment methodology it describes in its “Size Standards Methodology” white paper to adjust the statutory alternative size standard for inflation. The methodology involves selecting an inflation measure, calculating the inflation factor, and applying the inflation factor to the current size standard to determine the inflation-adjusted size standard. The proposed rule seeks public input on the inflation adjustment of the statutory alternative size standard.

 

Why is inflation adjustment of statutory alternative size standard?

The inflation adjustment of the statutory alternative size standard is necessary because inflation has eroded the value of the interim statutory alternative size standard in real terms since it was established in 2010. Inflation, as measured by the change in GDP price index, has increased more than 34% since 2010. The SBA has an important policy objective of maintaining the value of monetary-based size standards in real (i.e., inflation-adjusted) terms. Therefore, the SBA is proposing to adjust the statutory alternative size standard for inflation to ensure that it retains its value and remains an effective tool for small businesses seeking loans through its Business Loan Programs. The proposed rule seeks public input on the inflation adjustment of the statutory alternative size standard to ensure that the adjustment is appropriate and effective.

 

Why is inflation adjustment of statutory alternative size standard important?

The inflation adjustment of the statutory alternative size standard is important because it ensures that the size standard retains its value and remains an effective tool for small businesses seeking loans through the SBA’s Business Loan Programs. Inflation, as measured by the change in GDP price index, has increased more than 34% since the establishment of the interim statutory alternative size standard in 2010. This has eroded the value of the size standard in real terms, making it less effective in helping small businesses that need financial assistance. By adjusting the statutory alternative size standard for inflation, the SBA can maintain the value of the size standard in real terms and ensure that small businesses in different industries have equal access to SBA loans. The proposed rule seeks public input on the inflation adjustment of the statutory alternative size standard to ensure that the adjustment is appropriate and effective.

 

Summarizy inflation adjustment to Surety bond guarantee limits

The inflation adjustment to Surety Bond Guarantee Limits is a rulemaking by the SBA that seeks to adjust the existing limit of $10 million to maintain the same percentage spread (the lower limit is 65% of the upper limit). The adjustment is necessary to maintain the value of monetary-based bonding limits in real (i.e., inflation-adjusted) terms. The results of the inflation adjustment were $8,764,625 and $13,846,154 million if a Federal agency certifies necessity, which were rounded to $9 million and $14 million, respectively. The proposed rule seeks public input on the inflation adjustment of the Surety Bond Guarantee Limits to ensure that the adjustment is appropriate and effective.

 

Why is inflation adjustment to Surety bond guarantee limits important?

The inflation adjustment to Surety Bond Guarantee Limits is important because inflation has eroded the value of the bonding limits in real terms since the limits were set by Congress in 2013. Based on the CPI, inflation has increased more than 30% since 2013. This has made the bonding limits less effective in helping small businesses that need financial assistance. By adjusting the bonding limits for inflation, the SBA can maintain the value of the limits in real terms and ensure that small businesses have access to the bonding limits they need to participate in federal contracts. The proposed rule seeks public input on the inflation adjustment of the Surety Bond Guarantee Limits to ensure that the adjustment is appropriate and effective.

#SBAloan #smallbusinessfinancing #CDC504loan #SBA7a #smallbusinessloans #SBAfunding #businessgrowth #SBAapproved #entrepreneurship

 

This document is designed solely for the purpose of providing general information and does not serve as a recommendation or an invitation to procure advisory services. The information within this document should not be interpreted as establishing an advisory relationship, and readers are advised not to act upon this information without seeking professional legal counsel. The perspectives and opinions expressed within this document are those of the individual author alone and do not necessarily reflect the views of CFO Enrollment. While we endeavor to ensure that the content on our website is comprehensive, precise, and current, we do not guarantee its completeness, accuracy, or timeliness.