Proposed Rule2023-15899
Small Business Size Standards: Adjustment of Alternative Size Standard for SBA's 7(a) and CDC/504 Loan Programs for Inflation; and Surety Bond Limits: Adjustments for Inflation
Primary source
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Published
July 28, 2023
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA or Agency) proposes to amend its Small Business Size Regulations to increase the alternative size standard for its 7(a) Business and Certified Development Company (CDC/504) Loan Programs (collectively "Business 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. SBA also is adjusting 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.
Full Text
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<title>Federal Register, Volume 88 Issue 144 (Friday, July 28, 2023)</title>
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[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Proposed Rules]
[Pages 48739-48760]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-15899]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 88 , No. 144 / Friday, July 28, 2023 /
Proposed Rules
[[Page 48739]]
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 115 and 121
RIN 3245-AG16
Small Business Size Standards: Adjustment of Alternative Size
Standard for SBA's 7(a) and CDC/504 Loan Programs for Inflation; and
Surety Bond Limits: Adjustments for Inflation
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency)
proposes to amend its Small Business Size Regulations to increase the
alternative size standard for its 7(a) Business and Certified
Development Company (CDC/504) Loan Programs (collectively ``Business
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. SBA also is
adjusting 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.
DATES: SBA must receive comments to this proposed rule on or before
September 26, 2023.
ADDRESSES: Identify your comments by RIN 3245-AG16 and submit them by
one of the following methods: (1) Federal eRulemaking Portal:
<a href="http://www.regulations.gov">www.regulations.gov</a>. Follow the instructions for submitting comments;
or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Office
of Size Standards, 409 Third Street SW, Mail Code 6530, Washington, DC
20416.
SBA will post all comments to this proposed rule on
<a href="http://www.regulations.gov">www.regulations.gov</a>. If you wish to submit confidential business
information (CBI) as defined in the User Notice at <a href="http://www.regulations.gov">www.regulations.gov</a>,
you must submit such information to U.S. Small Business Administration,
Khem R. Sharma, Ph.D., Chief, Office of Size Standards, 409 Third
Street SW, Mail Code 6530, Washington, DC 20416, or send an email to
<a href="/cdn-cgi/l/email-protection#89fae0f3ecfafde8e7ede8fbedfac9faebe8a7eee6ff"><span class="__cf_email__" data-cfemail="dfacb6a5baacabbeb1bbbeadbbac9facbdbef1b8b0a9">[email protected]</span></a>. Highlight the information that you consider to
be CBI and explain why you believe SBA should hold this information as
confidential. SBA will review your information and determine whether it
will make the information public.
FOR FURTHER INFORMATION CONTACT: Khem Sharma, Ph.D., Chief, Office of
Size Standards, (202) 205-6618 or <a href="/cdn-cgi/l/email-protection#ddaeb4a7b8aea9bcb3b9bcafb9ae9daebfbcf3bab2ab"><span class="__cf_email__" data-cfemail="26554f5c435552474842475442556655444708414950">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background for Small Business Size Standards
To determine eligibility for Federal small business assistance, SBA
establishes small business size definitions (usually referred to as
``size standards'') for private sector industries in the United States.
SBA uses two primary measures of business size for size standards
purposes: average annual receipts over the last five years (either
three years or five years for SBA financial assistance programs) 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 (i.e., average annual receipts or average number of
employees), or tangible net worth and net income-based alternative size
standards to determine eligibility for those programs.
On September 27, 2010, the Small Business Jobs Act of 2010 (``Jobs
Act'') was enacted (Pub. L. 111-240). Section 1116 of the Jobs Act
added a new Section 3(a)(5) to the Small Business Act that directed SBA
to establish an alternative size standard using maximum tangible net
worth and average net income for applicants of the SBA's 7(a) Business
and CDC/504 Loan Programs (collectively ``Business Loan Programs'').
The Jobs Act also established for applicants for the SBA's Business
Loan Programs an interim alternative size standard of not more than $15
million in tangible net worth and of not more than $5 million in the
average net income after Federal income taxes (excluding any carry-over
losses) of the applicant for the two full fiscal years before the date
of the application (referred to as ``Interim Rule''). Under the Jobs
Act, this interim statutory alternative size standard would remain in
effect until such time as SBA has established a new alternative size
standard for the Business Loan Programs through rulemaking. 15 U.S.C.
632(a)(5). Prior to that, SBA employed a lower regulatory alternative
size standard that applied to the CDC/504 Loan Program, and applied
temporarily to the 7(a) Loan Program for the period beginning on May 5,
2009, and ending on September 30, 2010. 13 CFR 120.301(b)(2).
On September 29, 2010, SBA issued Information Notice 5000-1175
(available at <a href="https://www.sba.gov/sites/default/files/files/bank_5000-1175_0.pdf">https://www.sba.gov/sites/default/files/files/bank_5000-1175_0.pdf</a>) providing that, effective September 27, 2010, the new
statutory alternative size standard applied to its Business Loan
Programs, thereby replacing and superseding the lower existing
alternative size standard of $8.5 million in tangible net worth and $3
million in average net income, as set forth in 13 CFR 121.301(b)(2).
The Information Notice further stated that the new statutory
alternative size standard would remain in effect until such time as SBA
has established a permanent alternative size standard for the Business
Loan Programs through rulemaking. The Information Notice also stated
that the SBA's disaster loan program, surety bond guarantee program,
SBIC program, and small business development and contracting programs,
as well as other Federal programs utilizing SBA's industry-based size
standards were not affected by the interim statutory alternative size
standard, and the current standards for those programs in 13 CFR part
121 remained in effect.
SBA has not established an alternative size standard for its 7(a)
and CDC/504 Loan Programs in its regulations. Thus, the Agency
continues to use the interim statutory alternative size standard to
determine eligibility for a small business concern under SBA's Business
Loan Programs, in addition to using the industry-based size standards.
A loan applicant is eligible either under its industry-based size
standard or if it
[[Page 48740]]
meets the statutory alternative size standard of $15 million in
tangible net worth and $5 million in average net income. However, due
to the lack of rulemaking to codify these levels, SBA's current
regulations at 13 CFR 120.301(b)(2) continue to show the tangible net
worth of $8.5 million and net income of $3 million that existed prior
to the enactment of the interim statutory alternative size standard.
A review of SBA's internal data on its Business Loan Programs for
fiscal years 2021-2022 shows that the interim statutory alternative
size standard may have enabled some small businesses that were not
otherwise eligible under their industry-based size standards to receive
7(a) or CDC/504 Loans (``Business Loans''). However, SBA's internal
data systems for its Business Loan Programs lack the necessary detailed
electronic data that would allow for an assessment of the exact impact
of the interim statutory size standard on small business loan
applicants. Since the Agency's electronic systems only include data
regarding the number of employees, the NAICS industry, and approved
loan amount for each SBA loan recipient, but not the data regarding
average annual receipts, tangible net worth, average net income, or
whether the loan was approved under the industry or alternative size
standard, SBA cannot easily calculate the exact number of businesses
that qualified under the interim statutory alternative size standard
that otherwise could not have qualified under their industry-based size
standards. Similarly, due to the lack of data, SBA cannot easily
identify industries or industry sectors in which the statutory
alternative size standard helped small businesses the most or the least
in accessing SBA Business Loans.
In accordance with its regulations, SBA is required to assess the
impact of inflation on its monetary-based size standards at least once
every five years (67 FR 3041; January 23, 2002) and 13 CFR 121.102(c)).
Accordingly, except for the statutory alternative size standard for the
SBA Business Loan Programs, SBA adjusted its monetary-based size
standards for inflation three times since the Congress enacted the
Interim Rule in 2010.\1\ In its rulemaking for each adjustment, SBA
provided that the statutorily set alternative size standard will remain
in effect until SBA establishes a permanent alternative size standard
for the SBA Business Loan Programs. Based on the GDP price index,
inflation has increased more than 34% since the enactment of the
statutory alternative size standard. This has eroded the value of the
alternative size standard in real terms. SBA has an important policy
objective of maintaining the value of monetary-based size standards in
real (i.e., inflation-adjusted) terms, and by adjusting the statutory
alternative size standard for inflation. This rulemaking fulfils that
objective. Additionally, one of the comments SBA received to its joint
interim and final rule on inflation adjustment of monetary-based size
standards, published on November 17, 2022 (87 FR 69118), urged SBA to
immediately adjust for inflation the statutory alternative size
standard for SBA's 7(a) and CDC/504 Loan Programs and to include it in
future inflation adjustments of monetary size standards.
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\1\ Small Business Size Standards: Inflation Adjustment to
Monetary Based Size Standards (Interim Final Rule) (79 FR 33647;
June 12, 2014), finalized on January 25, 2016 (81 FR 3949); Small
Business Size Standards: Adjustment of Monetary-Based Size Standards
for Inflation (Interim Final Rule) (84 FR 34261; July 18, 2019),
finalized on November 17, 2022 (87 FR 69118); Small Business Size
Standards: Adjustment of Monetary-Based Size Standards, Disadvantage
Thresholds, and 8(a) Eligibility Thresholds for Inflation (Joint
Final and Interim Rule) (87 FR 69118; November 17, 2022).
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As stated earlier, due to the lack of relevant data, SBA is also
not in a position to easily determine whether levels of tangible net
worth and net income of the statutory alternative size standard are
appropriate under the current economic environment. For the same
reason, SBA is unable to develop an analysis to support the creation of
a different permanent alternative size standard based on tangible net
worth and average net income. The Economic and Agricultural Census data
that SBA examines to establish the industry-based size standards does
not contain information on tangible net worth or average net income by
industry. Furthermore, while SBA collects and maintains limited
relevant electronic data on each of the applicants for its Business
Loan Programs (such as NAICS industry code, the number of employees,
and approved loan amount), SBA's electronic data systems for Business
Loan Programs do not maintain the data on average annual receipts,
tangible net worth, average net income, and on whether an applicant for
its Business Loan Programs was determined to be eligible under its
industry based size standard or under the statutory alternative size
standard. Similarly, the electronic data does not include information
on the numbers or amounts of loan approvals that were issued under the
industry-based size standard or under the interim statutory alternative
size standard.
II. Background for Surety Bond Contract Limits
SBA is amending the contract limits applicable to its Surety Bond
Guarantee (SBG) Program. The 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.\2\
Surety bonds are important to small businesses interested in competing
for Federal contracts because the Federal Government requires prime
contractors, prior to the award of a Federal contract exceeding
$150,000 for the construction, alteration, or repair of any building or
public work of the United States, to furnish a performance bond issued
by a surety satisfactory to the officer awarding the contract, and in
an amount the contracting officer considers adequate, to protect the
government.
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\2\ A surety bond is a three-party instrument 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.
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The Housing and Urban Development Act of 1970 (Pub. L. 91-609)
authorized the SBA's SBG Program. The act amended Title IV of the Small
Business Investment Act of 1958 (15 U.S.C. 694a et seq., as amended) to
provide SBA authority to guarantee any surety against loss as the
result of a breach of the terms of a bid bond, payment bond, or
performance bond by a small business. SBA's guarantee gives Sureties an
incentive to provide bonding for small businesses and thereby assists
small businesses in obtaining greater access to contracting
opportunities. Based on the data for fiscal years 2021-2022, the SBG
Program assists about 1,700 small businesses annually.\3\ The program
guarantees individual contracts of up to $6.5 million, and up to $10
million for Federal contracts if a Federal contracting officer
certifies that such a guarantee is necessary. The $6.5 million limit
should be periodically adjusted for
[[Page 48741]]
inflation in accordance with 41 U.S.C. 1908. SBA's guarantee is an
agreement between a Surety and SBA that SBA will assume a certain
percentage of the Surety's loss should a contractor default on the
underlying contract. The SBA's guarantee currently ranges from 80% to
90% of the Surety's loss if a default occurs. For more information
about SBA's Surety Bond Guarantee Program, see <a href="https://www.sba.gov/funding-programs/surety-bonds">https://www.sba.gov/funding-programs/surety-bonds</a>.\4\
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\3\ U.S. Small Business Administration (SBA), FY 2024
Congressional Budget Justification and FY 2022 Annual Performance
Report, p. 44, <a href="https://www.sba.gov/sites/sbagov/files/2023-03/FY%202024%20SBA%20Congressional%20Budget%20Justification-2023-0313_0.pdf">https://www.sba.gov/sites/sbagov/files/2023-03/FY%202024%20SBA%20Congressional%20Budget%20Justification-2023-0313_0.pdf</a>.
\4\ Also see a July 8, 2022, Congressional Research Service
Report on ``SBA Surety Bond Guarantee Program,'' available at
<a href="https://crsreports.congress.gov/product/pdf/R/R42037">https://crsreports.congress.gov/product/pdf/R/R42037</a>.
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During fiscal years 2021-2022, SBA guaranteed 17,966 bid and final
(i.e., a payment bond, performance bond, or both a payment and
performance bond) surety bonds with a total contract value of about
$13.1 billion and total bond value of about $8.3 billion. According to
Table 1, Distribution of Number of Surety Bonds and Contract Value by
Contract Size (FY 2021-2022), during fiscal years 2021-2022, contracts
below $6.5 million accounted for 99.9% of total number of surety bonds
and 99% of total contract value. That means that contracts between $6.5
million and $10 million contributed to the limited bonding activity,
accounting for just 0.1% of total surety bonds and 1% of total contract
value.
As stated earlier, the SBG Program is intended to increase small
business' access to Federal, state, and local government contracting,
as well as private-sector contracting by guaranteeing bid and final
surety bonds. Table 2, Distribution of Surety Bonds, Contract Value,
and Bond Value by Contract Type (FY 2021-2022), shows that State and
Local Government contracting dominates the SBG program, accounting for
72% of the number of surety bonds, 66.5% of total contract value, and
51.7% of total bond value during fiscal years 2021-2022. The Federal
Government contracting accounts for 11% of surety bonds, 15% of total
contract value, and 18.1% of total bond value. For its part, private-
sector contracting accounts for 8.7% of surety bonds, 11.8% of contract
value, and 25.5% of bond value.
Table 1--Distribution of Number of Surety Bonds and Contract Value by Contract Size
[FY 2021-2022]
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Number of surety bonds Contract value
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Contract size ($ million) Value ($
Count % Cum. % million) % Cum. %
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<0.1.................................................... 2,092 11.6 11.6 $122 0.9 0.9
0.1 to 0.25............................................. 3,870 21.5 33.2 645 4.9 5.9
0.25 to 0.5............................................. 4,439 24.7 57.9 1,522 11.6 17.5
0.5 to 1.0.............................................. 3,449 19.2 77.1 2,386 18.2 35.7
1.0 to 2.0.............................................. 2,505 13.9 91.0 3,395 25.9 61.6
2.0 to 3.0.............................................. 872 4.9 95.9 2,030 15.5 77.1
3.0 to 4.0.............................................. 396 2.2 98.1 1,308 10.0 87.1
4.0 to 5.0.............................................. 191 1.1 99.2 818 6.2 93.4
5.0 to 6.5.............................................. 135 0.8 99.9 740 5.7 99.0
6.5 to 10.0............................................. 17 0.1 100.0 128 1.0 100.0
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Total............................................... 17,966 100.0 .............. 13,093 100.0 ..............
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Table 2--Distribution of Surety Bonds, Contract Value, and Bond Value by Contract Type
[FY 2021-2022]
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Surety bonds Contract value Bond value
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Contract type Amount ($ Amount ($
Count % million) % million) %
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Federal Government...................................... 2,039 11.3 $1,983 15.1 $1,509 18.1
Local Government........................................ 9,694 54.0 6,469 49.4 3,245 38.9
Private................................................. 1,558 8.7 1,541 11.8 2,127 25.5
Special Districts....................................... 1,377 7.7 784 6.0 316 3.8
State Government........................................ 3,236 18.0 2,243 17.1 1,072 12.8
Other................................................... 62 0.3 72 0.6 78 0.9
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Total............................................... 17,966 100.0 13,093 100.0 8,346 100.0
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SBA's guaranteed surety bonds fall in two categories: (1) bid
bonds, and (2) final bonds, which consist of a payment bond,
performance bond, or both a payment and performance bond. According to
the SBG program data for fiscal years 2021-2022, bid bonds account for
67.6% of total surety bonds and 70.7% of total contract value, but just
22.3% of total bond value. Final bonds account for 32.4% of total
bonds, 29.3% of total contract value, and 77.7% of total bond value.
Average bond value for bid bonds is about $153,000, as compared to more
than $1 million for final bonds. These results are provided in Table 3,
Distribution of Surety Bonds, Contract Value, and Bond Value by Bond
Type (FY 2021-2022).
[[Page 48742]]
Table 3--Distribution of Surety Bonds, Contract Value, and Bond Value by Bond Type
[FY 2021-2022]
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Number of bonds Contract value Bond value
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Bond type Amount ($ Amount ($
Count % billion) % billion) %
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Bid bonds............................................... 12,141 67.6 9.26 70.7 1.86 22.3
Final bonds............................................. 5,825 32.4 3.83 29.3 6.49 77.7
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Total............................................... 17,966 100.0 13.09 100.0 8.35 100.0
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The statutory surety bond contract limits have not been adjusted
since enacted in 2013. Rising inflation costs have eroded the buying
power of contractors. The average size of Federal contracts for
construction increased 134% from about $400,000 in 2013 to more than $1
million in 2022. Based on the SBG data for fiscal years 2021-2022, the
construction sector accounted for more than 95% of total number of
surety bonds, total contract value, and total bond amount. See Table 4,
Distribution of Surety Bonds, Contract Value, and Bond Value by
Business' NAICS Sector (FY 2021-2022), below. In this rule, SBA is
amending the contract limits in its regulations to keep pace with
inflation, which also will have the effect of keeping up with Federal
contracting trends.
Table 4--Distribution of Surety Bonds, Contract Value and Bond Value by Business' NAICS Sector
[FY 2021-2022]
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Number of bonds Contract value Bond value
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NAICS sector Sector title Amount ($ Amount ($
Count % million) % million) %
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11................................ Agriculture, 9 0.1 4.5 0.0 4.1 0.0
Forestry, Fishing
and Hunting.
21................................ Mining, Quarrying, 5 0.0 2.6 0.0 2.4 0.0
and Oil and Gas
Extraction.
22................................ Utilities........... 24 0.1 9.1 0.1 3.6 0.0
23................................ Construction........ 17,094 95.1 12,459.6 95.2 7,941.4 95.1
31-33............................. Manufacturing....... 213 1.2 155.4 1.2 93.9 1.1
42................................ Wholesale Trade..... 12 0.1 7.0 0.1 6.4 0.1
44-45............................. Retail Trade........ 8 0.0 4.8 0.0 4.4 0.1
48-49............................. Transportation and 7 0.0 9.4 0.1 13.7 0.2
Warehousing.
51................................ Information......... 2 0.0 1.9 0.0 1.0 0.0
53................................ Real Estate and 1 0.0 2.5 0.0 2.5 0.0
Rental and Leasing.
54................................ Professional, 126 0.7 87.1 0.7 50.1 0.6
Scientific, and
Technical Services.
56................................ Administrative and 452 2.5 341.8 2.6 220.5 2.6
Support and Waste
Management and
Remediation
Services.
71................................ Arts, Entertainment, 3 0.0 0.7 0.0 0.1 0.0
and Recreation.
72................................ Accommodation and 3 0.0 0.8 0.0 0.4 0.0
Food Services.
81................................ Other services...... 6 0.0 5.4 0.0 1.9 0.0
NA................................ NA.................. 1 0.0 0.2 0.0 0.0 0.0
-----------------------------------------------------------------------------------------------
Total......................... 17,966 100.0 13,092.8 100.0 8,346.4 100.0
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III. 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
[[Page 48743]]
through SBA Business Loan programs, of which 84% were issued through
7(a) Business Loan Program and 16% were dispersed through CDC/504 Loan
Program. The loan amount through those programs totaled $79.64 billion,
of which 82.6% was dispersed through 7(a) Program and 17.4% was
dispersed through CDC/504 Program.
As stated earlier, SBA's electronic systems for its business loan
data do not keep the data on receipts, tangible net worth, and net
income of applicants to its Business Loan Programs. Thus, to estimate
receipts, tangible net worth, and net income for each loan recipient,
SBA first converted the employment level of each SBA business loan
recipient to receipts using the receipts-to-employees ratios from the
special tabulations of the 2017 Economic Census (<a href="https://www.census.gov/econ/census/">https://www.census.gov/econ/census/</a>), 2017 Agricultural Census
<a href="http://www.agcensus.usda.gov/">www.agcensus.usda.gov/</a>), and 2017 County Business Patterns
(<a href="http://www.census.gov/econ/cbp/">www.census.gov/econ/cbp/</a>). The receipts of each loan applicant thus
estimated were then combined with the various financial ratios from the
Risk Management Association (RMA) (<a href="https://rmau.org">https://rmau.org</a>) to derive the
estimates of tangible net worth and net income for each loan applicant
using the following steps: \5\
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\5\ For this analysis, 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. Here ``net sales'' is
considered a proxy for receipts and ``profit before taxes a proxy''
for net income, subject to adjustment for taxes. Combining these
ratios with receipts allowed the estimation of tangible net worth
and net income for recipients to the SBA Business Loan Programs.
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Step 1: Estimate receipts equivalent of employment level for the i-
th loan recipient in the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.078
[GRAPHIC] [TIFF OMITTED] TP28JY23.079
Step 2: Estimate net fixed assets (NFA) for the i-th loan recipient
in the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.080
[GRAPHIC] [TIFF OMITTED] TP28JY23.081
Step 3: Estimate tangible net worth (TNW) for the i-th loan
recipient in the j-the industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.082
where TNWi,j is an estimate of tangible net worth of the i-th loan
recipient in the j-the industry and (NFA/TNW)j is the net fixed assets
to tangible net worth ratio in the j-th industry from RMA.
Step 4: Estimate net income (NI) for the i-th loan recipient in the
j-th industry.
[[Page 48744]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.083
[GRAPHIC] [TIFF OMITTED] TP28JY23.084
Step 5: Determine if a loan recipient meets an alternative size
standard using the estimates of tangible net worth ( and average net
income (NFA/TNWi,j) and the average net income (NIi,j).
whether the i-th applicant meets an alternative size standard:
{Meets if TNWi,j <=$15 million and NIi,j <=$5 million Does not meet if
TNWi,j > $15 million or NIi,j>$5 million or both
Excluding invalid observations (i.e., those with missing receipts
to-job-ratios or missing one or more RMA ratios used to estimate values
of tangible net worth and net income), 99.9% of SBA business loan
recipients during fiscal years 2021-2022 were found to be at or below
the statutory alternative size standard. However, the results do not
allow for the estimation of the number of loans in which the lender
applied the statutory alternative size standard to approve the loan
application.\6\
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\6\ The SBA electronic business loan data only contains
applicants that were approved for loans. Thus, the available data
does not show the number of applicants that were denied for SBA
loans based on their size eligibility.
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To assess the percentage of loan recipients that met the industry-
based size standard, SBA first converted all industry size standards to
receipts equivalent size standards as follows: (i) If an industry has a
receipt-based size standard, the receipts equivalent size standard is
the receipts-based size standard itself; and (ii) If an industry has an
employee-based size standard, the receipts equivalent size standard is
obtained by multiplying the employee-based size standard (number of
employees) by the ratio of small business receipts to small business
number of employees for that industry. For each of the loan recipients,
the receipts equivalent size standard for their industry was compared
with their estimated receipts in Step 1 above. If an applicant's
estimated receipts in Step 1 above was less than or equal to the
receipts equivalent size standard for its industry, the applicant is
deemed to have met the industry-based size standard. Conversely, if the
applicant's estimated receipts was higher than its industry receipts
equivalent size standard, the applicant is deemed to have exceeded the
industry-based size standard.
Mathematically,
whether the i-th applicant meets the industry-based size standard:
{Meets if Receiptsi,j
<= Receipts equivalent industry
- based standard Does not meet if Receiptsi,j
> Receipts equivalent industry-based standard
The results showed that, excluding invalid observations (i.e.,
observations with missing receipts-to-employee ratios or invalid NAICS
codes with no size standards), 99.6% of SBA loan recipients during
fiscal years 2021-2022 were deemed to be at or below their industry
size standards. These results, however, do not enable the estimation of
how often lenders applied industry-based size standards in approving
loan applications.
Table 5, Applicant's Eligibility Under the Statutory Alternative
and Industry-Based Size Standards (FY 2021-2022), summarizes the
applicant's eligibility results for the statutory alternative size
standard and industry based size standard. The data in Table 5 shows
that 99.5% of loan recipients (i.e., 117,288/117,882 = 0.995) were
found to have met both the industry-based and statutory alternative
size standard. Similarly, about 0.4% of loan recipients (i.e., 500/
117,882 = 0.004) that exceeded the industry-based size seemed to have
qualified under the statutory alternative size standard. There were
about 0.1% of loans (i.e., 81/117,882 = 0.001) that seemed to have
exceeded the statutory alternative size standard but appeared to have
qualified under the industry-based size standard. Overall, 99.9% (i.e.,
117,788/117,882 = 0.999) of total loan recipients were deemed small
under the statutory alternative size standard and 99.6% (i.e., 117,369/
117,882 = 0.996) of loan recipients were deemed small under the
industry-based size standard. Only 0.1% of loan recipients were found
to have exceeded the statutory alternative size standard and 0.4% of
recipients exceeded the industry-based size standard.
[[Page 48745]]
Table 5--Applicant's Eligibility Under the Statutory Alternative and Industry-Based Size Standards
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Alternative size standard
-------------------------------------- Total
Meets Does not meet
----------------------------------------------------------------------------------------------------------------
Industry size standard........... Meets............... 117,288 81 117,369
Does not meet....... 500 13 513
--------------------------------------------------------
Total........................ 117,788 94 * 117,882
----------------------------------------------------------------------------------------------------------------
*Note: This excludes invalid or incomplete observations in the form of invalid NAICS codes or missing RMA or
receipts-to-employee ratios to estimate tangible net worth, net income, or receipts equivalent size standards.
Based on the results obtained from this analysis, SBA estimates
that about 500 or 0.4% of loan approvals issued during fiscal years
2021-2022 went to firms that exceeded their industry based size
standard, thereby implying that these firms were most likely qualified
under the statutory alternative size standard. Based on the business
loan data for fiscal years 2021-2022, SBA estimates the total value of
such loans to be $1 billion, or 1.3% of $79.64 billion in total loans
approved during that period. Such a small percentage (0.4%) of loan
approvals issued to firms that exceeded their industry-based size
standards suggests that a vast majority of small businesses receiving
loans through SBA's Business Loan Programs would have qualified under
their industry-based size standards and would not be impacted
significantly by a modification, if any, to the statutory alternative
size standard.
The evaluation of the business loan data for fiscal years 2021-2022
showed that the vast majority of SBA business loans have gone to
businesses much smaller than the statutory alternative or industry-
based size standard. For example, as shown in Table 6, Distribution of
Number of Loans and Loan Amount by Employment Size (FY 2021-2022), 71%
of total business loans and 51.5% of loan amount went to businesses
that had just 10 or fewer employees (including those with no
employees). Similarly, loan recipients with 50 or fewer employees
(including those with no employees) accounted for nearly 97% of loans
and 92% of the loan amount. The average loan amount increased from less
than $200,000 for loan recipients with no employees to about $2.9
million for those with more than 200 employees.
Table 6--Distribution of Number of Loans and Loan Amount by Employment Size
[FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of loans Approved loan amount
------------------------------------------------------------------------------------------------ Average loan
Applicant size (Number of employees) Amount ($ amount ($)
Count % Cum. % million) % Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0....................................... 11,398 9.6 9.6 $2,230.3 2.8 2.8 $195,673
1 to 10................................. 72,723 61.4 71.0 38,757.1 48.7 51.5 532,941
11 to 25................................ 22,371 18.9 89.9 21,956.8 27.6 79.0 981,483
26 to 50................................ 8,302 7.0 96.9 10,554.4 13.3 92.3 1,271,302
51 to 75................................ 1,902 1.6 98.5 2,948.8 3.7 96.0 1,550,356
76 to 100............................... 890 0.8 99.3 1,446.3 1.8 97.8 1,625,044
101 to 150.............................. 507 0.4 99.7 1,003.2 1.3 99.1 1,978,692
151 to 200.............................. 204 0.2 99.9 374.4 0.5 99.5 1,835,244
201 to 250.............................. 69 0.1 100.0 200.2 0.3 99.8 2,901,916
>250.................................... 58 0.0 100.0 167.0 0.2 100.0 2,878,597
---------------------------------------------------------------------------------------------------------------
Total............................... 118,424 100.0 .............. 79,638.3 100.0 .............. 672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
Distributions of number of loans and loan amount by tangible net
worth and net income also showed similar patterns in that smaller loan
recipients that were way below the size standard accounted for the vast
majority of total loans and total loan amount. For example, as shown in
Table 7, Distribution of Loans and Loan Amount by Tangible Net Worth
(FY 2021-2022), below, loan recipients with less than $250,000 in
tangible net worth accounted for 81% of total loans and about 63% of
loan amount. Similarly, loan recipients with less than $1 million in
tangible net worth accounted for 95% of total loans and about 89% of
total loan amount. Finally, about 99.5% of total loans and loan amount
went to businesses with less than $15 million in tangible net worth.
The average loan amount generally increased with the level of tangible
net worth.
[[Page 48746]]
Table 7--Distribution of Loans and Loan Amount by Tangible Net Worth
[FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of loans Approved loan amount
Applicant size ($ millions of tangible ------------------------------------------------------------------------------------------------ Average loan
net worth) Amount ($ amount ($)
Count % Cum. % million) % Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0....................................... 11,330 9.6 9.6 $2,219.7 2.8 2.8 $195,910
0 to 0.1................................ 64,628 54.6 64.1 31,615.8 39.7 42.5 489,196
0.1 to 0.25............................. 19,971 16.9 81.0 16,289.3 20.5 62.9 815,650
0.25 to 0.5............................. 10,448 8.8 89.8 11,922.1 15.0 77.9 1,141,085
0.5 to 0.75............................. 4,051 3.4 93.2 5,478.6 6.9 84.8 1,352,396
0.75 to 1.0............................. 2,229 1.9 95.1 3,163.8 4.0 88.8 1,419,390
1.0 to 2.5.............................. 3,723 3.1 98.3 5,920.6 7.4 96.2 1,590,286
2.5 to 5.0.............................. 978 0.8 99.1 1,785.4 2.2 98.4 1,825,532
5.0 to 7.5.............................. 238 0.2 99.3 456.9 0.6 99.0 1,919,827
7.5 to 10.0............................. 93 0.1 99.4 167.9 0.2 99.2 1,804,951
10.0 to 12.5............................ 65 0.1 99.4 114.5 0.1 99.4 1,760,852
12.5 to 15.0............................ 34 0.0 99.5 61.8 0.1 99.4 1,817,097
15.0 to 20.0............................ 40 0.0 99.5 83.4 0.1 99.5 2,085,250
20.0 to 25.0............................ 18 0.0 99.5 32.5 0.0 99.6 1,804,189
25.0 to 30.0............................ 8 0.0 99.5 21.2 0.0 99.6 2,648,163
>30.0................................... 28 0.0 99.5 41.2 0.1 99.7 1,469,957
NA *.................................... 542 0.5 100.0 263.8 0.3 100.0 486,792
---------------------------------------------------------------------------------------------------------------
Total............................... 118,424 100.0 .............. 79,638.3 100.0 .............. 672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs and RMA ratios or invalid NAICS codes.
As shown in Table 8, Distribution of Loans and Loan Amount by Net
Income (FY 2021-2022), below, nearly 80% of total loans and 78% of loan
amount went to recipients with less than $100,000 in net income.
Similarly, 99.2% of total loans and 98.7% of loan amount went to
recipients with less than $1 million in net income. Recipients at or
below $5 million in net income accounted for 99.5% of total loans and
99.7% of total loan amount.
Table 8--Distribution of Loans and Loan Amount by Net Income
[FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of loans Approved loan amount
Applicant size ($ millions of net ------------------------------------------------------------------------------------------------ Average loan
income) Amount ($ amount ($)
Count % Cum. % million) % Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0....................................... 11,330 9.6 9.6 $2,219.7 2.8 2.8 $195,910
0 to 0.1................................ 94,360 79.7 89.2 59,995.2 75.3 78.1 635,812
0.1 to 0.25............................. 8,423 7.1 96.4 10,627.2 13.3 91.5 1,261,693
0.25 to 0.5............................. 2,481 2.1 98.5 3,920.3 4.9 96.4 1,580,116
0.5 to 0.75............................. 677 0.6 99.0 1,312.9 1.6 98.0 1,939,273
0.75 to 1.0............................. 256 0.2 99.2 497.0 0.6 98.7 1,941,401
1.0 to 2.5.............................. 308 0.3 99.5 694.8 0.9 99.5 2,255,715
2.5 to 5.0.............................. 38 0.0 99.5 92.6 0.1 99.7 2,436,392
5.0 to 7.5.............................. 5 0.0 99.5 4.1 0.0 99.7 813,560
7.5 to 10.0............................. 2 0.0 99.5 5.6 0.0 99.7 2,805,850
10.0 to 12.5............................ 1 0.0 99.5 1.0 0.0 99.7 1,000,000
12.5 to 15.0............................ .............. 0.0 99.5 0.0 0.0 99.7 ..............
15.0 to 20.0............................ 1 0.0 99.5 4.2 0.0 99.7 4,160,000
NA *.................................... 542 0.5 100.0 263.8 0.3 100.0 486,792
---------------------------------------------------------------------------------------------------------------
Total............................... 118,424 100.0 .............. 79,638.3 100.0 .............. 672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs and RMA ratios or invalid NAICS codes.
The business loan data for fiscal years 2021-2022 shows that the
vast majority of loan actions occurred in industries with receipts-
based size standards. For example, as shown in Table 9, Distributions
of Loans and Loan Amount by Size Standards Type (FY 2021-2022),
industries with receipts-based size standards accounted for nearly 87%
of total loans and about 83% of loan amount. Industries with employee-
based size standards accounted for about 13% of loans and about 17% of
loan amount.
[[Page 48747]]
Table 9--Distributions of Loans and Loan Amount by Size Standards Type
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Number of loans Approved loan amount
---------------------------------------------------------------
Size standard type Amount ($
Count % billion) %
----------------------------------------------------------------------------------------------------------------
Employee-based.................................. 15,682 13.2 13.8 17.3
Receipts-based.................................. 102,612 86.6 65.8 82.6
NA *............................................ 130 0.1 0.0 0.0
---------------------------------------------------------------
Total....................................... 118,424 100.0 79.6 100.0
----------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs
and RMA ratios or invalid NAICS codes with missing size standards.
The distributions of number of loans and loan amount by NAICS
sector are presented in Table 10, Distributions of Loans and Loan
Amount by NAICS Sector (FY 2021-2022). Consistent with Table 9, above,
sectors with receipts-based size standards account for the largest
proportions of loans and loan amount. For example, based on the data
for fiscal years 2021-2022, sectors with receipts-based size standards,
including Sector 72 (Accommodation and Food Services), Sector 44-45
(Retail Trade), Sector 62 (Health Care and Social Assistance), Sector
23 (Construction), and Sector 81 (Other Services) account for 56% of
loans and 58% of loan amount during fiscal years 2021-2022. Among the
sectors with employee-based size standards, Sector 31-33
(Manufacturing) accounted for 7.6% of loans and 9.8% of loan amount.
Table 10--Distributions of Loans and Loan Amount by NAICS Sector
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Number of loans Approved loan amount
---------------------------------------------------------------
Sector code Sector title Amount
Count % ($million) %
----------------------------------------------------------------------------------------------------------------
11............................ Agriculture, 1,465 1.2 1,050 1.3
Forestry,
Fishing and
Hunting.
21............................ Mining, 245 0.2 236 0.3
Quarrying, and
Oil and Gas
Extraction.
22............................ Utilities....... 190 0.2 98 0.1
23............................ Construction.... 2,713 10.7 5,933 7.4
31-33......................... Manufacturing... 8,968 7.6 7,788 9.8
42............................ Wholesale Trade. 5,488 4.6 5,005 6.3
44-45......................... Retail Trade.... 5,851 13.4 11,730 14.7
48-49......................... Transportation 7,254 6.1 2,888 3.6
and Warehousing.
51............................ Information..... 989 0.8 643 0.8
52............................ Finance and 2,531 2.1 1,460 1.8
Insurance.
53............................ Real Estate and 3,840 3.2 3,031 3.8
Rental and
Leasing.
54............................ Professional, 10,181 8.6 5,505 6.9
Scientific, and
Technical
Services.
55............................ Management of 99 0.1 103 0.1
Companies and
Enterprises.
56............................ Administrative 5,811 4.9 2,391 3.0
and Support and
Waste
Management and
Remediation
Services.
61............................ Education 1,616 1.4 927 1.2
Services.
62............................ Health Care and 12,205 10.3 8,970 11.3
Social
Assistance.
71............................ Arts, 3,384 2.9 2,079 2.6
Entertainment,
and Recreation.
72............................ Accommodation 15,039 12.7 13,664 17.2
and Food
Services.
81............................ Other services.. 10,555 8.9 6,138 7.7
---------------------------------------------------------------
Grand Total............... 118,424 100.0 79,638 100.0
----------------------------------------------------------------------------------------------------------------
IV. Comparing Industry-Based Size Standards With Statutory Alternative
Size Standard
For this, SBA converted all industry-based size standards to
tangible net worth and net income equivalents using the following
steps:
Step 1: Convert all industry-based size standards to the receipts-
equivalent size standard. If an industry has a receipt-based size
standard, the receipts-equivalent size standard is the receipts-based
size standard itself. If an industry has an employee-based size
standard, the receipts-equivalent size standard is obtained by
multiplying the employee-based size standard (number of employees) by
the ratio of small business receipts to small business number of
employees for that industry.
Step 2: Estimate net fixed assets (NFA) using the receipts
equivalent size standard for the j-th industry.
[[Page 48748]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.085
[GRAPHIC] [TIFF OMITTED] TP28JY23.086
Step 3: Estimate tangible net worth (TNW) equivalent of receipts
equivalent size standard for the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.087
where TNWj is an estimate of tangible net worth corresponding to the
receipts equivalent size standard in the j-the industry and (NFA/TNW)j
is the net fixed assets to tangible net worth ratio in the j-th
industry from RMA.
Step 4: Estimate net income (NI) equivalent of the receipts
equivalent size standard for the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.088
[GRAPHIC] [TIFF OMITTED] TP28JY23.089
Step 5: Determine whether the industry size standard is lower or
higher than the statutory alternative size standard in relative terms
using tangible net worth equivalent obtained in Step 3 and net income
equivalent from Step 4.
whether the industry size standard f or the j-th industry is lower or
highter than the alternative size standard:
{Lower if TNWj <=$15 million and NIj <=$5 million Higher if TNWj >$15
mission or NIj >$5 million or both
Excluding observations with missing or incomplete information
(i.e., observations with missing receipts-to-job ratios or missing one
or more of the RMA ratios), above analysis yielded tangible net worth
and net income equivalents of the industry-based size standards for 955
industries under NAICS 2022, a distribution of which is shown in Table
11, Comparison Between Industry-Based and Statutory Alternative Size
Standards (FY 2021-2022). The results show that whether the industry-
based size standard is lower or higher than the statutory alternative
size standard in relative terms is contingent on whether the industry
has a receipts- or employee-based size standard. For example, in
relative terms, for 82.5% of industries with employee-based size
standards, the industry based size standard is found to be higher than
the tangible net worth ($15 million) and net income ($5 million) based
interim statutory alternative size standard. It is quite opposite among
the industries with the receipts-based size standards. For nearly 93%
of industries that have a receipts-based size standard, the industry
size standard is relatively smaller than the statutory alternative size
standard.
[[Page 48749]]
These results suggest that the statutory alternative size standard
provides more benefits to applicants in the receipts-based industries
as compared to employee-based industries. Table 12, Comparison Between
Industry-Based and Statutory Alternative Size Standards by NAICS Sector
(FY 2021-2022), summarizes these results by sector. For the vast
majority of industries in such sectors 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. Opposite is the case 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 where the statutory alternative size standard is relatively
higher than the industry-based size standards.
Table 11--Comparison Between Industry-Based and Statutory Alternative Size Standards
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Whether industry size standard is
lower or higher than statutory
Size standard type alternative size standard Total
--------------------------------------
Higher Lower
----------------------------------------------------------------------------------------------------------------
Employee-based......................................... 392 (82.5%) 83 (17.5%) 475 (100%)
Receipts-based......................................... 35 (7.3%) 445 (92.7%) 480 (100%)
--------------------------------------------------------
Total.............................................. 427 (44.7%) 528 (55.3%) 955 (100%)
----------------------------------------------------------------------------------------------------------------
Note: Figures in parentheses are percentages based on row totals.
Table 12--Comparison Between Industry-Based and Statutory Alternative Size Standards by NAICS Sector
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Whether industry size standard is
lower or higher than statutory
Sector code Sector title alternative size standard Total
--------------------------------------
Higher Lower
----------------------------------------------------------------------------------------------------------------
11............................... Agriculture, 0 (0.0%) 63 (100.0%) 63 (100.0%)
Forestry, Fishing
and Hunting.
21............................... Mining, Quarrying, 17 (81.0%) 4 (19.0%) 21 (100.0%)
and Oil and Gas
Extraction.
22............................... Utilities........... 12 (85.7%) 2 (14.3%) 14 (100.0%)
23............................... Construction........ 0 (0.0%) 30 (100.0%) 30 (100.0%)
31-33............................ Manufacturing....... 319 (92.2%) 27 (7.8%) 346 (100.0%)
42............................... Wholesale Trade..... 22 (31.9%) 47 (68.1%) 69 (100.0%)
44-45............................ Retail Trade........ 0 (0.0%) 57 (100.0%) 57 (100.0%)
48-49............................ Transportation and 15 (27.8%) 39 (72.2%) 54 (100.0%)
Warehousing.
51............................... Information......... 8 (28.6%) 20 (71.4%) 28 (100.0%)
52............................... Finance and 0 (0.0%) 16 (100%) 16 (100.0%)
Insurance.
53............................... Real Estate and 10 (41.7%) 14 (58.3%) 24 (100.0%)
Rental and Leasing.
54............................... Professional, 3 (6.3%) 45 (93.8%) 48 (100.0%)
Scientific, and
Technical Services.
55............................... Management of 0 (0.0%) 2 (100.0%) 2 (100.0%)
Companies and
Enterprises.
56............................... Administrative and 0 (0.0%) 44 (100.0%) 44 (100.0%)
Support and Waste
Management and
Remediation
Services.
61............................... Education Services.. 3 (17.6%) 14 (82.4%) 17 (100.0%)
62............................... Health Care and 3 (7.7%) 36 (92.3%) 39 (100.0%)
Social Assistance.
71............................... Arts, Entertainment, 9 (36.0%) 16 (64.0%) 25 (100.0%)
and Recreation.
72............................... Accommodation and 1 (6.7%) 14 (93.3%) 15 (100.0%)
Food Services.
81............................... Other services...... 5 (11.6%) 38 (88.4%) 43 (100.0%)
--------------------------------------------------------
Total........................ 427 (44.7%) 528 (55.3%) 955 (100.0%)
----------------------------------------------------------------------------------------------------------------
V. Advanced Notice of Proposed Rulemaking (ANPRM)
In 2018, SBA published in the Federal Register an advanced notice
of proposed rulemaking (ANPRM) seeking public input to assist in
establishing a permanent alternative size standard for its 7(a) and
CDC/504 Loan Programs (83 FR 12506; March 22, 2018). SBA also invited
suggestions on sources of relevant data and information that SBA should
evaluate in developing a permanent alternative size standard and in
assessing its impact. Specifically, ANPRM sought the comments on the
following issues:
1. SBA sought comment on whether the level of the temporary
statutory alternative size standard (i.e., $15 million in tangible net
worth and $5 million in average net income) is appropriate as a new
permanent alternative size standard under the credit environment at
that time. SBA asked commenters to provide data and supporting analysis
for supporting or not supporting the statutory alternative size
standard as a permanent alternative size standard.
2. SBA sought comment on the impact of using an alternative size
standard on small businesses seeking loans through its Business Loan
Programs, specifically information on industries/sectors where small
businesses benefit the most or do not benefit at all from the use of an
alternative size standard. SBA also asked for data on the number of
[[Page 48750]]
businesses approved for SBA's Business Loans under the interim
statutory alternative size standard that otherwise could not have been
approved under their industry based size standards.
3. SBA invited suggestions on sources of relevant data and
information, especially tangible net worth and average net income of
applicants to SBA's Business Loan Programs, that SBA can evaluate to
assess the impact of the statutory alternative size standard on small
businesses and use in developing a new permanent alternative size
standard and in estimating its impact.
4. SBA also sought comments on how the statutory alternative size
standard has affected the processes used by lenders participating in
the Business Loan Programs and what impacts a permanent alternative
size standard would have on application processes and processing times.
Discussion of Comments
SBA received a total of 34 comments on the ANPRM, of which 11 were
found to be not pertinent to the scope of the ANPRM. Of the 23 comments
that were pertinent, all 23 not only supported the statutory
alternative size standard, but also recommended making it the permanent
alternative size standard for the SBA's 7(a) and CDC/504 Loan Programs.
Commenters included two associations of lenders offering loans to
applicants to the Business Loan Programs--one representing lenders that
primarily served applicants to the 7(a) business loan program and other
representing mostly CDCs that offered loans under the 504/CDC loan
program--and their members supporting their respective position on the
ANPRM. Specifically, there were 11 comments (six of which were from
different individuals of one 7(a) lender) that supported the position
of the association of 7(a) lenders and 8 comments that either supported
the position of the association of the CDCs or provided the similar
comments as that association. The remainder of commenters consisted of
individual lending entities that provided SBA's guaranteed loans.
Interestingly, commenters included no small businesses that applied to
or received loans from SBA's Business Loan Programs. Below SBA
discusses these comments by topic.
Comments on Appropriateness of the Statutory Alternative Size Standard
as A Permanent Alternative Size Standard
An association commenter expressed support for establishing a
permanent alternative size standard to applicants for the SBA's Loan
Programs. In order to provide meaningful comments to the ANPRM, the
association conducted an informal survey seeking comments from its 572
members, of which 67 responded. While an overwhelming majority of the
respondents (88%) supported making the statutory alternative size
standard permanent, three recommended decreasing the standard and one
recommended increasing it to $20 million in tangible net worth and $7.5
million in average net income. Based on the input from its members, the
association recommended that the statutory alternative size standard
should be made permanent because it has not only simplified the loan
application process, but it also has enabled a small number of
businesses above the industry specific size standards to qualify for
SBA's 7(a) financing. Additionally, the association maintained that it
is not aware of any negative impacts of using the statutory alternative
size standard, such as exclusion of businesses from loan eligibility.
However, citing the lack of information the association did not provide
any data and analysis to support its position.
Another association stated that making the statutory alternative
size standard permanent is vital for allowing small businesses to
access credit through the SBA's 504 loan program. The association
maintained that the statutory alternative size standard has enabled
small businesses that were not otherwise eligible under their industry-
based size standards to receive CDC/504 loans. It added that using
industry-based size standards in conjunction with the statutory
alternative size standard has been beneficial to capturing small
businesses that require credit through the CDC/504 Loan Program. As to
whether the level of the statutory alternative size standard is still
appropriate, the association stated that the current level is
sufficient and should remain as is until such time as economic
conditions, inflation, and other factors warrant an increase. It
expressed concerns with potential unintended consequences of deviating
from the statutory alternative size standard. A few other individual
lenders also supported making the statutory alternative size standard
permanent for SBA's Business Loan Programs.
SBA Response
Section 1116 of the Jobs Act requires SBA to establish a permanent
alternative size standard using maximum tangible net worth and average
net income for applicants of the SBA's Business Loan Programs. The Jobs
Act also established for applicants for the SBA's Business Loan
Programs a statutory alternative size standard of not more than $15
million in tangible net worth and of not more than $5 million in the
average net income after Federal income taxes (excluding any carry-over
losses) of the applicant for the two full fiscal years before the date
of the application. SBA agrees with the commenters that the statutory
alternative size standard has not only simplified the loan application
process but also has enabled some applicants above the industry-based
size standard to qualify for SBA's Business Loan Programs. Based on the
analysis of its internal business loan data for fiscal years 2021-2022,
SBA found that 500 loans totaling more than $1 billion were approved
under the statutory alternative size standard which otherwise would not
have qualified under the industry-based size standard. SBA agrees with
the comment that the interim statutory alternative size standard has
not caused any negative impacts such as excluding applicants from loan
eligibility. Rather, using the statutory alternative size standard in
conjunction industry-based size standards has expanded eligibility for
SBA Business Loan Programs, especially for applicants from industries
with receipts-based size standards. In absence of its negative impacts
on businesses seeking SBA loans, SBA agrees with the commenters that
the statutory alternative size standard can serve as a permanent
alternative size standard.
Comments Relating to the Impact of Using the Statutory Alternative Size
Standard on Small Businesses
An association maintained that the statutory alternative size
standard has both simplified the loan application process and allowed a
small number of businesses that might not have qualified under the
industry based size standards to receive 7(a) financing. Based on input
from its members, the association identified various industries/sectors
that benefit from the use of the statutory alternative size standard
for the SBA's 7(a) loan program. These include manufacturers;
distributors; software, technology and professional services;
construction; warehousing; retail trade (e.g., car dealers);
hospitality industry; and agriculture businesses. Other commenters
maintained that healthcare firms and professional organizations have
also benefited from the SBA's Business Loan Programs. However, the
association indicated that it does not have the data related to the
number of
[[Page 48751]]
businesses that might have qualified for loans under the statutory
alternative size standard, which would not have qualified under the
industry- based size standards.
Another association indicated that certified development companies
(CDCs) have historically used the alternative size standard to
establish eligibility for the CDC/504 program and that only
circumstance where the industry-based size standard would be used is
when the applicant is too large to qualify under the alternative size
standard but would meet the industry based size standard. The
association was also unable to offer data on the number of applicants
approved under CDC/504 loans under the statutory alternative size
standard that could not otherwise be approved under the industry-based
size standard because, it stated, most CDCs use the alternative size
standard for eligibility purposes and therefore do not capture data
relevant to eligibility under the industry-based size standard.
SBA Response
SBA agrees with the commenters that the statutory alternative size
standard has not only simplified the loan application process, but it
also has enabled some applicants to SBA's Business Loan Programs which
might otherwise not have qualified under the industry-based size
standards to receive SBA loans. This is consistent with SBA's analysis
which showed 500 or 0.4% of loans which would likely not have qualified
under the industry-based size standards to qualify under the statutory
alternative size standard. SBA agrees with a commenter's list of
industries or sectors that have benefited most from the statutory
alternative size standard. SBA's analysis of the data for fiscal years
2021-2022 also showed hospitality, health care, construction,
manufacturing, retail trade, and professional services industries
benefiting most from the statutory alternative size standard.
Comments Pertaining to Data Sources
Based on the input from its members responding to the survey, the
above-referenced association suggested a few data sources, including
the Risk Management Association (RMA), Moody's, Dun and Bradstreet,
PayNet, IBISWorld, Federal tax returns, Survey of Business Owners,
SBA's own loan application and oversight data, and the U.S. Business
Census. Another commenter also suggested RMA, IBISWorld, and Dun and
Bradstreet. A separate association commenter suggested that SBA should
use its own data on applicants to the CDC/504 loan program.
SBA Response
In response to the comment, SBA has evaluated the various RMA
financial ratios for estimation of tangible net worth and net income
for applicants to the SBA's Business Loan Programs. By combining
industry ratios from RMA with receipts-to-job ratios from Economic
Census tabulations, as discussed previously, SBA was able to estimate
tangible net worth and net income for each recipient of SBA's business
loans. By combining these results with industry-based size standards,
SBA was able to estimate the number of loans that were approved under
the statutory alternative size standard which otherwise would not have
qualified under the industry-based size standards.
Comments Relating to Impacts of a Permanent Alternative Size Standard
on Application Process and Processing Times
Based on the survey responses and anecdotally, an association
maintained that the statutory alternative size standard has simplified
and streamlined the 7(a) loan application process because it is the
same for all businesses and lenders do not have to look up NAICS codes.
Citing one lender, the association added that using industry-based size
standards takes more time and can be more difficult if the company's
operation involves multiple NAICS codes. As to the effects a permanent
size standard would have on application processes and processing times,
the association noted that because lenders participating in the 7(a)
program have treated the current ``temporary'' alternative size
standard as if it were permanent, it would not expect a ``permanent''
alternative size standard to significantly alter either application
processes or loan processing times.
Another commenter maintained that because most CDCs have
historically used the alternative size standard for small business
eligibility purposes, a permanent alternative size standard would be
``business as usual'' for the CDC industry with no effect on
application processes and processing times.
One commenter indicated that the alternative size standard has
aided in streamlining the lending process and served as catalyst to
increase lending to small businesses, thereby contributing to the
recovery from the 2007-2009 Great Recession.
SBA Response
SBA agrees with the comment that, by avoiding the use of NAICS
codes in determining applicants' size eligibility, using the
alternative size standard has benefitted lenders in terms of
simplifying and streamlining the loan application process. It has also
helped relieve applicants of the burden of keeping three years or
potentially five years of data to establish eligibility using industry-
based size standards.
VI. Appropriateness of Interim Statutory Alternative Size Standard as
the Permanent Alternative Size Standard
Section 1116 of the Jobs Act directed SBA to establish an
alternative size standard based on tangible net worth and net income
for determining size eligibility for applicants to the Agency's 7(a)
and CDC/504 Loan Programs. As stated previously, the Jobs Act also
established the interim statutory alternative size standard of $15
million tangible net worth and $5 million of net income to remain in
effect until SBA establishes a permanent alternative size standard
based on tangible net worth and net income.
In the absence of evidence of supporting a different alternative
size standard for 7(a) and CDC/504 Loan Programs and in the absence of
any negative impacts of using the statutory alternative size standard,
SBA is proposing to adopt the statutory alternative size standard of
$15 million in tangible net worth and $5 million in net income 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. Most commenters to the March 2018
ANPRM also recommended adopting the interim statutory alternative size
standard as a permanent alternative size standard for SBA's Business
Loan Programs. This proposed rule seeks comment and 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
[[Page 48752]]
permanent alternative size standard. Based on the data for fiscal years
2021-2022, nearly all (99.9%) of recipients of loans from SBA's
Business Loan Programs were found to be at or below the interim
statutory alternative size standard (see Table 5). In comparison, about
95-96% of firms are considered small under the current industry-based
size standards. The interim statutory alternative size standard seemed
to have enabled 500 applicants that would not have otherwise qualified
under the industry-based size standard to receive SBA's loans. The vast
majority of business loans and loan amounts went to businesses that
were well below the statutory alternative size standard. For example,
during fiscal years 2021-2022, loan recipients with tangible net worth
of just $1 million or less accounted for 95% of loans and nearly 89% of
loan amount (see Table 7). Similarly, 98.5% of loans and 96.4% of loan
amount went to businesses with net income of $0.5 million or less (see
Table 8). These results indicate that the interim statutory alternative
size standard, subject to adjustment for inflation, is serving well its
intended purposes in terms of rendering applicants that do not qualify
under the industry-based size standard eligible for SBA's Business Loan
Programs.
For nearly 93% of industries with receipts-based size standards, in
relative terms, the interim statutory alternative size standard was
higher than the current industry-based size standard. Industries with
receipts-based size standards accounted for the vast majority of loan
actions, accounting for 87% of total loans and 83% of loan amount
during fiscal years 2021-2022 (see Table 9). Only for 17.5% of the
industries with employee-based size standards, the industry-based size
standard was, in relative terms, smaller than the statutory alternative
size standard. However, industries with employee-based size standards
accounted for 13% loans and 17% of loan amount. Applicants in those
industries will continue to qualify under the industry-based size
standards, many of which have been increased as part of the second
five-year review of size standards under Section 1344 of the Jobs Act.
SBA also considered returning the alternative size standard to that
adopted by SBA prior to the passage of the Jobs Act (i.e., $8.5 million
in tangible net worth and $3 million in net income), but, because the
statutory alternative size standard significantly exceeded the prior
alternative size standard, using the prior alternative size standard
would be counter to Congressional direction. Additionally, the old
alternative size standard would have rendered 144 applicants ineligible
for SBA's Business Loan Programs which would otherwise have qualified
under the interim statutory alternative size standard.
SBA also considered increasing the statutory alternative size
standard beyond inflation-adjusted levels of $15 million of tangible
net worth and $5 million of net income. However, the analytical results
presented and discussed in the previous sections did not indicate that
an increase is warranted. Almost all loan recipients under the SBA's
Business Loan Programs seemed to be at or below the statutory
alternative size standard and the vast majority of loans went to
businesses that were significantly below the statutory alternative size
standard.
Accordingly, SBA proposes to adopt the statutory alternative size
standard as the permanent alternative size standard, subject to
inflation adjustment as discussed in the next section.
VII. Inflation Adjustment of Statutory Alternative Size Standard
For the inflation adjustment of the statutory alternative size
standard for SBA's Business Loan Programs, SBA has used the inflation
adjustment methodology it describes in its ``Size Standards
Methodology'' white paper, available at <a href="http://www.sba.gov/size">www.sba.gov/size</a>. SBA applied
the same methodology in its previous inflation adjustments, including
the latest inflation adjustment in 2022 (87 FR 69118; November 17,
2022). This methodology can be described in terms of the following
steps:
1. Selecting an inflation measure.
2. Selecting the base and end periods.
3. Calculating the inflation rate.
4. Making adjustments to the size standard.
1. Selecting an Inflation Measure
SBA establishes small business size standards to determine the
eligibility of businesses for a wide variety of SBA's and other Federal
programs. Many businesses participating in those programs are engaged
in multiple industries and are producing a wide range of goods and
services. Therefore, it is important that the Agency use a broad
measure of inflation to adjust its size standards. SBA's preferred
measure of inflation has consistently been the chain-type price index
for the U.S. Gross Domestic Product (GDP price index), published by the
U.S. Department of Commerce, Bureau of Economic Analysis (BEA) on a
quarterly basis as part of its National Income and Product Accounts
(NIPA), available at <a href="http://www.bea.gov">www.bea.gov</a>.\7\
---------------------------------------------------------------------------
\7\ As part of the 2014 inflation adjustment (79 FR 33647 (June
12, 2014)), SBA reviewed various measures of inflation published by
the Federal Government, including the GDP price index, consumer
price index (CPI), producer price index (PPI), personal consumption
expenditures (PCE) price index, and unit labor cost. Based on that
review, SBA determined that the GDP price index is the most
appropriate measure of inflation for purposes of adjusting size
standards for inflation. Historically, SBA has used the GDP price
index for adjusting size standards for inflation.
---------------------------------------------------------------------------
2. Selecting the Base and End Periods
For this inflation adjustment of the statutory alternative size
standard, SBA selected the third quarter of 2010 as the base period
because the size standard was enacted on September 27, 2010. SBA
selected the fourth quarter of 2022 as the end period because it was
the latest quarter for which GDP price index data were available when
this rule was developed.
3. Calculating the Rate of Inflation
The GDP price index for the base period (i.e., 3rd quarter of 2010)
was 96.312 and, according to the BEA GDP third estimate released on
March 30, 2023 (the latest available when this rule was prepared), the
GDP price index for the end period (i.e., 4th quarter of 2022) was
129.502. Accordingly, inflation increased 34.46% from the third quarter
of 2010 to the fourth quarter of 2022 (((129.502 / 96.312) - 1) x 100%
= 34.46%).
4. Making Adjustments to the Size Standard
Tangible net worth ($15 million) and net income ($5 million) of the
interim statutory alternative size standard were adjusted by
multiplying their current levels by 1.3446 and rounding the results to
the nearest $500,000. The results were $20.169 million for tangible net
worth and $6.723 million for net income, which were rounded to $20
million and $6.5 million, respectively. These results are presented in
Table 13, Adjustment of Statutory Alternative Size Standard for SBA
Business Loan Programs for Inflation.
[[Page 48753]]
Table 13--Adjustment of Statutory Alternative Size Standard for SBA Business Loan Programs for Inflation
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold name and value Base period and GDP price index End period and GDP price index
------------------------------------------------------------------------------------------------------------------------------------------------- Adjusted Adjusted
GDP price GDP price Inflation % threshold (not threshold
Name Value Base period index End period index rounded) (rounded)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Tangible net worth (Interim Rule)....... $15,000,000 Third quarter of 2010..... 96.312 Fourth quarter of 2022.... 129.502 34.46 $20,169,138 $20,000,000
Net income (Interim Rule)............... 5,000,000 Third quarter of 2010..... 96.312 Fourth quarter of 2022.... 129.502 34.46 6,723,046 6,500,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
VIII. Inflation Adjustment to Surety Bond Guarantee Limits
Section 1695 of the National Defense Authorization Act for Fiscal
Year 2013 (``NDAA 2013'') (Pub. L. 112-239; January 2, 2013) increased
the SBG guarantee limit to $6.5 million, and up to $10 million for a
Federal contract if a Federal contracting officer certifies that such a
guarantee is necessary.\8\ The act also included a provision to
periodically increase the $6.5 million limit for inflation in
accordance with 41 U.S.C. 1908.
---------------------------------------------------------------------------
\8\ Section 508 of the American Recovery and Reinvestment Act of
2009 (ARRA) (Pub. L.111-5; Feb 17, 2009) temporarily increased, from
February 17, 2009, through September 30, 2010, the maximum bond
amount from $2 million to $5 million. The act also authorized the
SBA to guarantee a bond of up to $10 million for Federal contracts
if a Federal contracting officer certified that such a guarantee was
necessary. Using its rulemaking authority, SBA made ARRA's temporary
size standard permanent on August 11, 2010 (76 FR 48549).
---------------------------------------------------------------------------
That provision, 41 U.S.C. 1908, provides that inflation adjustments
for acquisition-related dollar thresholds are to be set by the Federal
Acquisition Regulatory Council (FAR Council). It also requires that the
Consumer Price Index (CPI) is used to measure inflation. The FAR
Council is established under 41 U.S.C. 1302 to assist in the direction
and coordination of procurement policy and regulatory activities for
the Federal Government. The FAR Council is required to adjust
acquisition-related dollar thresholds every five years.
Based on CPI, inflation has increased more than 30% since 2013.
This has eroded the value of the bonding limits in real terms since the
limits were set by Congress in 2013. SBA has an important statutory
requirement to adjust the bonding limits in accordance with CPI and the
FAR Council. The current limits are $6.5 million and $10 million for
Federal contracts if a Federal agency certifies that a greater amount
is necessary. SBA has not adjusted its bonding limits since 2013.
The FAR Council has not set a specific threshold in the Federal
Acquisition Regulations (FAR) for SBA bonding limits. The FAR Council
adjusts the acquisition-related dollar thresholds every five years with
the last adjustments occurring in 2015 and 2020. The FAR Council had a
$6.5 million acquisition-related threshold in effect in 2013 when the
SBA bonding limits were set. In 2015, as part of inflationary
adjustments to the acquisition-related dollar thresholds, the FAR
Council increased the $6.5 million threshold to $7 million (80 FR
38293; July 2, 2015). Likewise, in 2020, the FAR Council adjusted the
$7 million threshold to $7.5 million (85 FR 62485; October 2, 2020).
The FAR did not have a $10 million threshold in effect in 2013.
In the absence of a specific FAR threshold for SBA bonding limits,
SBA proposes this adjustment which is to follow the FAR adjustment from
$6.5 million to $7.5 million in 2020 and then calculate an adjustment
from 2020 to 2023 using the same CPI methodology.
SBA is also adjusting the existing limit of $10 million to maintain
the same percentage spread (the lower limit is 65% of the upper limit).
By adjusting both at the same time, SBA maintains the effectiveness of
the necessity provision and avoids the upper limit becoming
meaningless, because if only the lower limit is adjusted then at some
point it will exceed the necessity limit. This rulemaking fulfills the
statutory objective of maintaining 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. These results are
presented in Table 14, Adjustment of Lower Surety Bond Contract Limit
($6.5 Million) for Inflation Using CPI from 2020 to 2023 and Table 15,
Adjustment of Surety Bond Upper Contract Limit ($10 Million) from 2013
to 2023.
Table 14--Adjustment of Surety Bond Lower Contract Limit ($6.5 Million) for Inflation Using CPI From 2020 to 2023
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold name and value Base period and consumer price index (CPI) End period and consumer price index (CPI) Adjusted Adjusted
------------------------------------------------------------------------------------------------------------------------------------------------- Inflation threshold (not threshold
Time period Value Base period CPI * End period CPI * rounded) (rounded)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2013 to 2020............................ $6,500,000 In 2015, the FAR Council adjusted the $6.5 million threshold to $7 million, and in 2020 adjusted it to $7.5 million. $7,500,000
------------------------------------------------------------------------------------------------------------------------
2020 to 2023............................ 7,500,000 March 2020................ 258.124 February 2023............. 301.648 16.86% $8,764,625 9,000,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Note: CPI data downloaded from the U.S. Bureau of Labor Statistics website on March 28, 2023.
[[Page 48754]]
Table 15--Adjustment of Surety Bond Upper Contract Limit ($10 Million) From 2013 to 2023
----------------------------------------------------------------------------------------------------------------
Current Adjusted threshold (not Adjusted
----------------------------------------------------------------- rounded) threshold
-------------------------------- (rounded)
Value Spread (%) ---------------
Value Spread (%) Value
----------------------------------------------------------------------------------------------------------------
Contract value: Lower limit..... $6,500,000 65 $9,000,000 65 $9,000,000
Contract value: Upper limit..... 10,000,000 100 13,846,154 100 14,000,000
----------------------------------------------------------------------------------------------------------------
IX. Section-by-Section Analysis
A. Section 121.301(a)
Section 1116 of the Jobs Act established a statutory alternative
size standard using maximum tangible net worth of $15 million and
maximum net income of $5 million, and it permanently extended the
application of the alternative size standard to the applicants to 7(a)
Business Loan Program. Prior to the Jobs Act, the alternative size
standard applied to 7(a) Business Loan Program on a temporary basis. To
recognize that the alternative size standard is no longer temporary,
Sec. 121.301(a) is revised as follows: ``For Business Loans and for
Disaster Loans (other than physical disaster loans), an applicant
business concern must satisfy two criteria:''
B. Section 121.301(b)
For the same reason as for Sec. Sec. 121.301(a) and 121.301(b) is
revised as follows: ``For 7(a) Business Loans and Development Company
programs, an applicant must meet one of the following standards:''
C. Section 121.301(e)
The Department of Labor (DOL) no longer issues the ``Area Trends in
Employment and Unemployment'' monthly publication, and DOL publishes
the list of Labor Surplus Areas (LSAs) annually rather than monthly. To
reflect this change, SBA is amending the second sentence in Sec.
121.301(e) as follows: ``The U.S. Department of Labor (DOL) issues the
Labor Surplus Area (LSA) list on a fiscal year basis on its website at
<a href="http://www.dol.gov/agencies/eta/lsa">www.dol.gov/agencies/eta/lsa</a>.''
D. Section 115.10 ``Applicable Statutory Limit''
Section 411(a)(1)(A) of the Small Business Investment Act of 1958
established a statutory limit for the maximum amount of a contract for
which SBA can guaranty a bond at $6.5 million. It also requires that
the $6.5 million limit be adjusted for inflation in accordance with 41
U.S.C. 1908. Section 411(a)(1)(B) established that the $6.5 million
limit can be exceeded up to a $10 million maximum if a contracting
officer of a Federal agency certifies that such a guaranty is
necessary.
To implement the inflation adjustment of the $6.5 million
threshold, and to maintain a proportional relationship between the
lower contract maximum and the upper contract maximum, the definition
of ``Applicable Statutory Limit'' found in Sec. 115.10 is revised by
removing $6.5 million and replacing it with $9 million, and by removing
$10 million and replacing it with $14 million in Sec. 115.12(e)(3).
For the same reason as for the definition of ``Applicable Statutory
Limit'' found in Sec. Sec. 115.10, and 115.12(e)(3) is revised by
removing $6,500,000 and replacing it with $9,000,000, and by removing
$10,000,000 and replacing it with $14,000,000.
X. Request for Comments
SBA invites public comments on this proposed rule, especially on
the following issues:
1. SBA welcomes comments from interested parties on SBA's size
standards methodology for inflation adjustment to the statutory
alternative size standard. Specifically, SBA seeks comment on whether
the GDP price index is an appropriate measure of inflation for
adjusting the alternative size standard. The Agency invites
suggestions, along with supporting data and analysis, if a different
measure of inflation would be more appropriate.
2. SBA seeks comment on whether the inflation-adjusted level of the
interim statutory alternative size standard (i.e., $15 million in
tangible net worth and $5 million in average net income, as of 2010) is
appropriate as a new permanent alternative size standard under the
current credit environment. SBA also invites data and supporting
analysis for supporting or not supporting the statutory alternative
size standard as a permanent alternative size standard.
3. SBA seeks comment on the impact of using the statutory
alternative size standard as the permanent alternative size standard on
small businesses seeking loans through its Business Loan Programs. SBA
also welcomes data on the number of businesses approved for SBA's
Business Loans under the statutory alternative size standard that
otherwise could not have been approved under their industry-based size
standards.
4. SBA invites suggestions on sources of relevant data and
information, especially tangible net worth and average net income of
applicants to SBA's Business Loan Programs, that SBA can evaluate to
assess the impact on small businesses of using the statutory
alternative size standard as the new permanent alternative size
standard.
5. SBA invites comments on its methodology for adjusting statutory
contract limits for its SBG Program, especially on SBA's approach to
adjust the $10 million contract limit for Federal contracts. SBA also
seeks comment on impacts the inflationary adjustment for contract
limits would have on small businesses seeking surety bonds.
XI. Compliance With Executive Order 12866, the Regulatory Flexibility
Act (5 U.S.C. 601-612), Executive Orders 13563, 12988, and 13132, and
the Paperwork Reduction Act (44 U.S.C., Ch. 35)
Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
proposed rule is a significant regulatory action for purposes of
Executive Order 12866. This proposed rule would affect applicants for
SBA's 7(a) Business and CDC/504 Loan Programs and, and businesses and
sureties that use the SBG Program. To help explain the need for this
rule and the rule's potential benefits and costs, SBA is providing
below a Regulatory Impact Analysis for this rule.
Regulatory Impact Analysis
1. What is the need for this regulatory action?
SBA is required by the Jobs Act to adopt an alternative size
standard based on tangible net worth and net income after taxes for its
7(a) and CDC/504 Loan Programs. SBA believes that adopting an
alternative size standard is in the best interests of small businesses
seeking SBA's financial assistance. SBA's
[[Page 48755]]
mission is to aid and assist small businesses through a variety of
financial, procurement, business development, and counseling programs.
To assist the intended beneficiaries of these programs effectively, SBA
establishes distinct definitions (usually referred to as ``size
standards'') to determine which businesses are deemed small businesses.
One of the SBA's missions has been to provide necessary financing to
small businesses that are not able to obtain loans in the commercial
market in reasonable terms. Many businesses that have exceeded their
industry-based size standards cannot grow and support their employees
without additional capital from SBA's financial assistance programs.
The alternative size standard established by Congress assisted some
small businesses that could not have otherwise qualified under their
industry-based size standards.
SBA is required to assess the impact of inflation on its monetary-
based size standards at least once every five years (67 FR 3041
(January 23, 2002) and 13 CFR 121.102(c)). Inflation, as measured by
the change in GDP price index, has increased more than 34% from the
enactment of the interim statutory alternative size standard in 2010.
Inflation has caused the statutory alternative size standard to
decrease in real terms, thereby forcing some businesses to lose small
business status and eligibility for SBA's Business Loan Programs. As
stated previously, SBA adjusted its monetary size standards three times
since the establishment of the statutory alternative size standard in
2010, but the Agency did not adjust the statutory alternative size
standard for SBA's Business Loan Programs. SBA has an important policy
objective of maintaining the value of monetary-based size standards in
real (i.e., inflation-adjusted) terms, and by adjusting the statutory
alternative size standard for inflation this rulemaking fulfils that
objective.
The Small Business Act delegates to SBA's Administrator
responsibility for establishing definitions for small business. The Act
requires that small business definitions vary to reflect industry
differences. 15 U.S.C. 632(a). Some businesses in need of financial
assistance from SBA's 7(a) and CDC/504 Loan Programs may exceed the
applicable size standard for their industries. The alternative size
standard, in addition to the industry-based size standards, would apply
uniformly across all industries and expand credit opportunities to
businesses that are in need of SBA's financial assistance. The
inflationary adjustment of the statutory alternative size standard
would not affect existing industry-based size standards, but would
rather supplement them and make financing available to otherwise
eligible applicants that exceed their industry-based size standards.
NDAA 2013 increased the SBG guarantee limit to $6.5 million, and up
to $10 million for a Federal contract if a Federal contracting officer
certifies that such a guarantee is necessary. The act also included a
provision to increase the $6.5 million limit periodically for inflation
in accordance with 41 U.S.C. 1908. Based on the CPI, inflation has
increased more than 30% since 2013. SBA has not adjusted its bonding
limits since 2013. This has eroded the value of the bonding limits in
real terms since the limits were set by Congress in 2013. The
adjustment of the SBG contract limits will bring them in line with
ongoing inflation and current contracting trends and increase
contracting opportunities to small businesses.
2. What are the potential benefits and costs of this regulatory action?
The most significant benefit of this regulatory action for
businesses is that certain businesses, especially in industries with
receipts-based size standards, would gain eligibility for SBA's
Business Loan Programs for which they would not otherwise be eligible
based on their industry-specific size standards or current alternative
size standards. This would allow them to attain financing that may be
critical to their continued growth or economic viability, which would
enable them to create or support more jobs in the economy.
Table 16, Comparison Between Industry-Based and Inflation-Adjusted
Statutory Alternative Size Standard (FY 2021-2022), compares the
percentages of industries that have higher industry-based size
standards relative to inflation-adjusted statutory size standard by
type of size standard. For nearly 96% of industries with receipts-based
size standards, the inflation-adjusted alternative size standard is
found to be, in relative terms, higher than the industry-based size
standards, thereby allowing businesses exceeding industry-based size
standards in those industries to qualify for 7(a) and CDC/504 Loan
Programs under the inflation-adjusted alternative size standard. The
corresponding figure for the interim statutory alternative size
standard was nearly 93%. On the other hand, for 77% of industries with
employee-based size standards, industry-based size standards were, in
relative terms, higher than the inflation-adjusted alternative size
standard. That figure for the interim statutory alternative size
standard was 82.5%. This suggests that the alternative size standard
provides more benefits to businesses in the receipts-based industries
than those with employee-based size standards. The higher inflation-
adjusted alternative size standard would continue to help businesses
above the industry-based size standards to receive SBA's financing.
Table 16--Comparison Between Industry-Based and Inflation-Adjusted Alternative Size Standard
[FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
Whether industry size standard Whether industry size standard
is higher or lower than is higher or lower than
interim statutory alternative inflation-adjusted statutory
Size standard type standard (Table 11) alternative standard Total
----------------------------------------------------------------
Higher Lower Higher Lower
----------------------------------------------------------------------------------------------------------------
Employee-based.................. 392 (82.5%) 83 (17.5%) 366 (77.1%) 109 (22.9%) 475 (100.0%)
Receipts-based.................. 35 (7.3%) 445 (92.7%) 20 (4.2%) 460 (95.8%) 480 (100.0%)
-------------------------------------------------------------------------------
Total....................... 427 (44.7%) 528 (55.3%) 386 (40.4%) 569 (59.6%) 955 (100.0%)
----------------------------------------------------------------------------------------------------------------
Table 17, Comparison Between Industry-Based and Inflation-Adjusted
Statutory Alternative Size Standards by Sector (FY 2021-2022), shows by
sector the impacts of inflation adjustment to the statutory alternative
size standard
[[Page 48756]]
on proportions of industries for which industry-based size standards
are higher than the inflation-adjusted alternative size standard.
Compared to the interim statutory alternative size standard, the
proportions of industries for which alternative size standard is higher
than the industry-based size standards are higher under the inflation-
adjusted alternative size standard, especially for industries with
employee-based size standards. For example, for just 7.8% of industries
in manufacturing, the statutory size alternative size standard was
higher than the industry-based size standards. That figure increases to
13.3% under the inflation-adjusted size standard. Another example is
wholesale trade, where the percentage of industries for which the
statutory alternative size standard is higher than the industry-based
size standard increases from about 68% under the statutory alternative
size standard to about 78% under the inflation-adjusted alternative
size standard.
Table 17--Comparison Between Industry-Based and Inflation-Adjusted Statutory Alternative Size Standards by Sector
[FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Whether industry size standard Whether industry size standard
is higher or lower than is higher or lower than
interim statutory alternative inflation-adjusted statutory
Sector code Sector title standard (Table 12) alternative standard Total
----------------------------------------------------------------
Higher Lower Higher Lower
--------------------------------------------------------------------------------------------------------------------------------------------------------
11........................................ Agriculture, Forestry, 0 (0.0%) 63 (100.0%) 0 (0.0%) 63 (100.0%) 63 (100.0%)
Fishing and Hunting.
21........................................ Mining, Quarrying, and Oil 17 (81.0%) 4 (19.0%) 17 (81.0%) 4 (19.0%) 21(100.0%)
and Gas Extraction.
22........................................ Utilities................... 12 (85.7%) 2 (14.3%) 12 (85.7%) 2 (14.3%) 14 (100.0%)
23........................................ Construction................ 0 (0.0%) 30 (100.0%) 0 (0.0%) 30 (100.0%) 30 (100.0%)
31-33..................................... Manufacturing............... 319 (92.2%) 27 (7.8%) 300 (86.7%) 46 (13.3%) 346 (100.0%)
42........................................ Wholesale Trade............. 22 (31.9%) 47 (68.1%) 15 (21.7%) 54 (78.3%) 69 (100.0%)
44-45..................................... Retail Trade................ 0 (0.0%) 57 (100.0%) 0 (0.0%) 57 (100.0%) 57 (100.0%)
48-49..................................... Transportation and 15 (27.8%) 39 (72.2%) 12 (22.7%) 42 (77.8%) 54 (100.0%)
Warehousing.
52........................................ Finance and Insurance....... 0 (0.0%) 16 (100%) 0 (0.0%) 16 (100.0%) 16 (100.0%)
53........................................ Real Estate and Rental and 10 (41.7%) 14 (58.3%) 6 (25.0%) 18 (75.0%) 24 (100.0%)
Leasing.
54........................................ Professional, Scientific, 3 (6.3%) 45 (93.8%) 3 (6.3%) 45 (93.8%) 48 (100.0%)
and Technical Services.
55........................................ Management of Companies and 0 (0.0%) 2 (100.0%) 0 (0.0%) 2 (100.0%) 2 (100.0%)
Enterprises.
56........................................ Administrative and Support 0 (0.0%) 44 (100.0%) 0 (0.0%) 44 (100.0%) 44 (100.0%)
and Waste Management and
Remediation Services.
61........................................ Education Services.......... 3 (17.6%) 14 (82.4%) 2 (11.8%) 15 (88.2%) 17 (100.0%)
62........................................ Health Care and Social 3 (7.7%) 36 (92.3%) 3 (7.7%) 36 (92.3%) 39 (100.0%)
Assistance.
71........................................ Arts, Entertainment, and 9 (36.0%) 16 (64.0%) 4 (16.0%) 21 (84.0%) 25 (100.0%)
Recreation.
72........................................ Accommodation and Food 1 (6.7%) 14 (93.3%) 0 (0.0%) 15 (100.0%) 15 (100.0%)
Services.
81........................................ Other services.............. 5 (11.6%) 38 (88.4%) 4 (9.3%) 39 (90.7%) 43 (100.0%)
-------------------------------------------------------------------------------------------------------------
Total................................. ............................ 427 (44.7%) 528 (55.3%) 386 (40.4%) 569 (59.6%) 955 (100.0%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
SBA cannot make a precise determination of the number of businesses
that were approved under the alternative size standard for 7(a) or CDC/
504 Business Loans since the enactment of the statutory alternative
size standard in 2010, because the Agency does not store the data on
whether an applicant for its 7(a) or CDC/504 Loan Program was qualified
under its industry-based size standard or under the alternative size
standard. The available data show that the alternative size standard
established by Congress enabled some small businesses above the
industry-based size standards to get SBA's financing. However, SBA is
still seeking public comment regarding the regulation's specific
impact.
As stated elsewhere, SBA also does not compile the data on average
annual receipts, net worth, and net income. The only available data on
business size is the number of employees. SBA examined its 7(a) and
CDC/504 loan data for fiscal years 2021-2022. Based on this data, SBA
estimates that 500 recipients of the SBA Business Loans (or 0.4% of the
total loans) that appeared to have exceeded their industry-based size
standards were granted 7(a) and CDC/504 loans, implying that most
likely they qualified under the statutory alternative size standard.
Thus, this result indicates that the higher interim alternative size
standard expanded credit availability to more small businesses through
SBA's 7(a) and CDC/504 Loan Programs. The even higher inflation-
adjusted alternative size standards would further expand the financing
to small businesses that would not have otherwise qualified under the
interim alternative size standard or under the industry-based size
standards. This would lead to more business formation,
entrepreneurship, job growth, and community development.
Table 18, Applicant's Eligibility Under the Inflation-Adjusted
Statutory Alternative and Industry-Based Size Standards (FY 2021-2022),
shows the eligibility of recipients of SBA loans through 7(a) and CDC/
504 Programs during fiscal years 2021-2022 under the industry-based and
inflation-adjusted alternative size standard. More than 99.5% (i.e.,
117,327/117,882 = 0.9953) of loan recipients were found to have met
both the industry-based size standards and the inflation-adjusted
alternative size standard. As in the case of the statutory alternative
size standard, about 500 or 0.4% of loan recipients that did not meet
the industry-based size standard met inflation-adjusted alternative
size standard. About 0.1% (i.e., 94/117,882 =
[[Page 48757]]
0.001) of loan recipients were found to have exceeded the interim
statutory alternative size standard. That figure was 0.05% (i.e., 54/
117,882 = 0.0005) for the inflation-adjusted alternative size standard.
Thus, 40 loan recipients that did not meet the statutory size standard
met the inflation-adjusted alternative size standard.
Table 18--Applicant's Eligibility Under the Inflation-Adjusted Statutory Alternative and Industry-Based Size Standards
[FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Interim statutory alternative Inflation-adjusted alternative
size standard (Table 5) size standard
---------------------------------------------------------------- Total
Meets Does not meet Meets Does not meet
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry size standard.................... Meets....................... 117,288 81 117,327 42 117,369
Does not meet............... 500 13 501 12 513
-------------------------------------------------------------------------------
Total................................. ............................ 117,788 94 117,828 54 * 117,882
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Note: This excludes invalid or incomplete observations in the form of invalid NAICS codes or missing RMA or receipts-to-employee ratios to estimate
tangible net worth, net income, or receipts equivalent size standard.
Based on the data for 2017 Economic Census, Agricultural Census,
and County Business Patterns special tabulations, SBA estimated that
about 6,275 businesses that are above the interim statutory alternative
size standard would qualify under the inflation-adjusted alternative
size standard. About 25 additional SBA Business Loans, totaling up to
$50 million, would be made to these newly-qualified businesses using
the higher inflation-adjusted alternative size standard. That
constitutes less than 0.1% of the loan activity during fiscal years
2021-2022. These results are consistent with results in Tables 7 and 8
(above) which showed that only a very small fraction of the SBA
Business Loans and loan amount go to businesses that were close to the
tangible net worth and net income thresholds of the statutory size
standard. As discussed previously, the results in Tables 7 and 8
(above) showed that the vast majority of SBA Business Loans go to
businesses that are significantly below the tangible net worth and net
income thresholds of the statutory alternative size standard.
The 7(a) Loan Program, SBA's largest loan program, includes
financial help for businesses with special requirements. Small
businesses can use SBA's 7(a) guaranteed loans for short and long term
working capital, revolving funds based on inventory or receivables,
fixed assets, and refinancing. Small businesses can use SBA's CDC/504
loans for the purchase of land, buildings, improvements, and equipment.
These loans provide long-term, fixed-rate financing to small businesses
to acquire real estate or machinery or equipment for expansion or
modernization. The CDC/504 loan proceeds are generally limited to fixed
assets and their related soft costs.
Businesses are often denied SBA's loans for reasons unrelated to
the use of the loan proceeds, the concern's ability to repay the loan,
or other credit based reasons. Rather, they can be denied because they
exceed the size standards for their industries. Some business concerns
that exceed their industry-based size standards might be eligible for
SBA's financial assistance under the alternative size standard that
this proposed rule adopts.
Raising the SBG bond guarantee limits would increase contracting
opportunities for more small businesses and bring the limits in line
with inflation. Due to the lack of data, SBA is unable to estimate the
number of additional small businesses that would qualify to apply for
bonding through the SBG Program for non-Federal (e.g., state
government, local government, private-sector, etc.) contracting because
of proposed increases to bond guarantee limits for inflation. Because
the construction sector accounts for more than 95% of surety bonds and
total value of bonded contracts, to estimate the number of additional
small businesses and contracts that would qualify for surety bonds on
Federal contracts, SBA analyzed the small business contract awards from
FPDS-NG for the construction sector for fiscal years 2021-2022. These
results are presented in Table 19, Federal Contracts in Construction
for Fiscal Years 2021-2022. Because of the proposed increase to the
lower contract limit from $6.5 million to $9 million, without
contracting officer's certification, annually up to about 150-155
additional small businesses would be eligible to apply for surety bonds
on about 175-180 Federal construction contracts totaling between $1.4
billion and $1.5 billion in value. Similarly, as a result of the
proposed increase to the upper contract limit from $10 million to $14
million, with contracting officer's certification, annually up to about
100-110 additional small businesses would be eligible to apply for
surety bonds on 110-120 Federal construction contracts totaling between
$1.3 billion and $1.4 billion in value. This increase in small business
contracting would support job creation and economic growth.
Table 19--Federal Contracts in Construction for Fiscal Years 2021-2022
----------------------------------------------------------------------------------------------------------------
Total contract
Contract limits Number of Number of value ($
small firms contracts billion)
----------------------------------------------------------------------------------------------------------------
<=6.5 million................................................... 6,100 25,312 10.7
>$6.5 million <=$9 million...................................... 155 179 1.4
>9 million <=$10 million........................................ 45 45 0.4
>$10 million to <=$14 million................................... 106 115 1.3
>$14 million.................................................... 142 172 5.3
-----------------------------------------------
[[Page 48758]]
Total....................................................... 6,547 25,822 19.1
----------------------------------------------------------------------------------------------------------------
Raising the contract bond limits could lead to larger contracts
being guaranteed by the SBA and, as a result, could increase the risk
of program losses. To determine if higher contract limits would
increase the risk of program losses, SBA analyzed all claim activity
from October 1, 2020 to March 31, 2023. These results are presented in
Table 20, Net Claims by Contract Size for October 1, 2020 to March 31,
2023. The results showed a positive relationship between contract size
and net claims. For example, contracts below $1 million in value
accounted for nearly 66% of total claims but accounted for only 29% of
net claim amount. On the other hand, contracts above $1 million in
value accounted for 34% of claims but accounted for 71% of total net
claim amount. Thus, the data suggest that higher contract limits may
lead to larger contracts being guaranteed, which in turn may lead to an
increase in defaults and, as a result, higher losses. However, SBA is
unable to estimate exact losses due to the lack of data to estimate the
number of additional surety bonds on non-Federal contracts resulting
from increases to contract bond limits.
Table 20--Net Claims by Contract Size for October 1, 2020 to March 31, 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of claims Net claim
-----------------------------------------------------------------------------------------------
Contract size ($ million) Amount ($
Count % Cum. % million) % Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
<0.1.................................................... 12 5.8 5.8 $0.5 0.9 0.9
0.1 to 0.25............................................. 32 15.4 21.2 2.3 4.3 5.2
0.25 to 0.5............................................. 50 24.0 45.2 4.2 7.9 13.1
0.5 to 1.0.............................................. 43 20.7 65.9 8.5 16.1 29.3
1.0 to 2.0.............................................. 44 21.2 87.0 17.7 33.5 62.8
2.0 to 3.0.............................................. 8 3.8 90.9 5.1 9.6 72.4
3.0 to 4.0.............................................. 10 4.8 95.7 5.5 10.5 82.9
4.0 to 5.0.............................................. 7 3.4 99.0 5.0 9.4 92.3
5.0 to 6.5.............................................. 2 1.0 100.0 4.1 7.7 100.0
-----------------------------------------------------------------------------------------------
Total............................................... 208 100.0 .............. 52.7 100.0 ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increasing the interim alternative size standard applicable to
SBA's 7(a) and CDC/504 Loan Programs for inflation and enabling more
small businesses to obtain SBA's financing as a result would entail no
additional implementation or operational costs as the necessary
administrative and regulatory requirements are already in place. Same
holds true for proposed inflationary increases to contract limits for
the SBG program.
Initial Regulatory Flexibility Analysis
Under the Regulatory Flexibility Act (RFA), this proposed rule, if
adopted, may have a significant impact on a substantial number of small
entities. As described above, this proposed rule could affect small
entities seeking assistance through SBA's (7a) and CDC/504 Loan and SBG
Programs.
Immediately below, SBA sets forth an initial regulatory flexibility
analysis (IRFA) of this proposed rule addressing the following
questions: (1) What are the need for and objective of the proposed
rule?; (2) What are SBA's description and estimate of the number of
small entities to which the proposed rule would apply?; (3) What are
the projected reporting, record keeping, and other compliance
requirements of the proposed rule?; (4) What are the relevant Federal
Government rules that may duplicate, overlap, or conflict with the
proposed rule?; and (5) What alternatives will allow the Agency to
accomplish its regulatory objectives while minimizing the impact on
small entities?
(1) What are the need for and objective of the rule?
Under the Jobs Act, SBA is required to adopt an alternative size
standard using maximum tangible net worth and net income for its 7(a)
and CDC/504 Loan Programs. The Jobs Act defined an interim statutory
alternative standard based on tangible net worth of $15 million and net
income of $5 million until the SBA Administrator permanently designates
an alternative size standard based on tangible net worth and net income
for those programs. Many businesses that exceed their industry-based
size standards cannot grow and support their employees and other
businesses that depend on them without additional capital from SBA's
financial assistance programs. The proposed inflation-adjusted
alternative size standard would enable such businesses to qualify for
SBA's 7(a) and CDC/504 Loan Programs.
Section 3(a) of Small Business Act (15 U.S.C. 632(a)) gives the
SBA's Administrator responsibility to establish and change small
business size standards. Within its administrative discretion, SBA
implemented a policy in its regulations to review the effect of
inflation on size standards at least once every five years (13 CFR
121.102(c)) and make any changes as appropriate. SBA has adjusted its
monetary-based size standards three times since the enactment of the
interim statutory alternative size standard in 2010. However, SBA did
not adjust the statutory alternative in each of those adjustments.
Inflation, as measured by the change in GDP price index, has increased
more than 34% since 2010. This has eroded the value of the statutory
alternative size alternative in real terms. Consequently, many
businesses above their industry-based size standards and in need of
financial assistance from SBA's 7(a) or CDC/504
[[Page 48759]]
Loan Programs may have exceeded the statutory alternative size standard
and lost eligibility for benefits of those programs. The inflationary
adjustment of the statutory alternative size standard in this proposed
rule will enable such businesses to qualify for those programs. The
alternative size standard applies uniformly across all industries and
does not affect existing size standards by industry. Rather it
supplements them, by making more financing available to otherwise
ineligible businesses that exceed their industry-based size standard.
Regarding the SBG Program, NDAA 2013 increased the SBG guarantee
limit to $6.5 million, and up to $10 million for a Federal contract if
a Federal contracting officer certifies that such a guarantee is
necessary. The act also included a provision to increase the $6.5
million limit periodically for inflation in accordance with 41 U.S.C.
1908. Based on the CPI, inflation has increased more than 30% since
2013. SBA has not adjusted its bonding limits since 2013. This has
eroded the value of the bonding limits in real terms since the limits
were set by Congress in 2013. This has adversely impacted small
business contractors seeking bonding assistance from the SBA SBG
Program. The adjustment of the SBG contract limits will bring them in
line with ongoing inflation and current contracting trends and increase
contracting opportunities to small businesses.
(2) What are SBA's description and estimate of the number of small
entities to which this proposed rule would apply?
This rule would apply to more than 8.1 million employer firms, of
which 98.2% are small under industry-based size standards and 92.5% are
small under the interim statutory alternative size standard. About
92.6% of firms would qualify as small under the inflation-adjusted
alternative size standard. About 6,275 firms that are above the interim
statutory alternate size standard would qualify as small under the
inflation-adjusted size alternative standard. That is less than 0.1% of
firms that are small under the interim statutory alternative size
standard.
For the reasons provided elsewhere in this rule, because of lack of
relevant data (e.g., receipts, tangible net worth and net income of
loan recipients), SBA cannot precisely state the number of businesses
that were approved under the alternative size standard for 7(a) or CDC/
504 loans and the number of newly-defined small businesses that will
qualify under the inflation-adjusted alternative size standard for
loans under these programs. However, based on the analysis of the
available data for fiscal years 2021-2022, SBA estimates that at least
500 7(a) or CDC/504 loans (or 0.4% of total loans) were likely approved
under the alternative size standard that otherwise would not have
qualified under the industry-based size standard.
With respect to the SBG program, more than 95% of the bonding
activity is concentrated in the construction sector. Based on the 2017
Economic Census, there are 689,260 small employer firms in construction
to which this proposed rule would apply. Additionally, about 2.5% of
the bonding activity occurs in 11 industries in Sector 56 with more
than 209,000 small firms in those industries to which this rule would
also apply. More small businesses would qualify to apply for surety
bonds as a result of proposed increases to statutory bonding limits.
(3) What are the projected reporting, record keeping, and other
compliance requirements of the proposed rule?
A new size standard does not impose any additional reporting,
record keeping, or compliance requirements on small entities. Revising
size standards alters the access to SBA programs that assist small
businesses, but does not impose a regulatory burden as the size
standards neither regulate nor control business behavior.
(4) What are the relevant Federal Government rules that may duplicate,
overlap, or conflict with the rule?
This proposed rule does not overlap with other Federal rules
because it is limited to SBA's own 7(a) and CDC/504 Loan Programs.
(5) What alternatives will allow the Agency to accomplish its
regulatory objectives while minimizing the impact on small entities?
There are no alternatives to establishing a size standard for the
Agency's 7(a) and CDC/504 Loan Programs based on an applicant's
tangible net worth and net income because this is a statutory
requirement. Specifically, the Jobs Act directs the Agency to use a
firm's tangible net worth of not more than $15 million and average net
income after Federal income taxes (excluding any carry-over losses) for
the two full fiscal years immediately before its application is not
more than $5 million until the Administrator adopts a different,
permanent alternative size standard based on net worth and net income
measures. SBA has proposed to make the interim statutory alternative
size standard as a permanent alternative size standard, subject to
adjustment for inflation that has occurred since the standard's
establishment in 2010. SBA has requested information from the public on
using the interim statutory alternative size standard as the permanent
alternative size standard and on adjusting it for inflation.
Executive Order 13563
A description of the need for this proposed regulatory action and
its associated benefits and costs associated with this action,
including possible impacts that relate to Executive Order 13563 are
included above in the Regulatory Impact Analysis. This proposed rule
will, if adopted, further expand the benefits of the Jobs Act which
also increased the upper limits of loans available under the 7(a) and
CDC/504 Loan Programs, without restricting their access and
availability to qualified entities. By increasing the SBG statutory
contract limits would increase contracting opportunities to small
businesses.
Executive Order 12988
This action meets applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. This rule does not
have retroactive or preemptive effect.
Executive Order 13132
For purposes of Executive Order 13132, SBA has determined this
rulemaking will not have substantial, direct effects on the States, on
the relationship between the National Government and the States, or on
the distribution of power and responsibilities among the various levels
of government. Therefore, SBA has determined that this proposed rule
has no federalism implications warranting preparation of a federalism
assessment.
Paperwork Reduction Act
For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,
SBA has determined that this rulemaking will not impose any new
reporting or record keeping requirements.
List of Subjects
13 CFR Part 115 and 13 CFR Part 121
Administrative practice and procedure, Government property, Grant
programs--business, Individuals with disabilities, Loan programs--
business, Reporting and recordkeeping
[[Page 48760]]
requirements, Bonding, Surety, Small businesses.
For the reasons set forth in the preamble, SBA proposes to amend 13
CFR part 115 and 13 CFR part 121 as follows:
0
1. The authority citation for part 115 continues to read as follows:
Authority: 5 U.S.C. app 3; 15 U.S.C. 636i, 687b, 687c, 694a,
and 694b note.
PART 115--SURETY BOND GUARANTEE
0
2. Amend Sec. 115.10 by revising the definition of ``Applicable
Statutory Limit'' to read as follows:
Sec. 115.10 Definitions.
Applicable Statutory Limit means the maximum amount, set forth
below, of any Contract or Order for which SBA is authorized to
guarantee, or commit to guarantee, a Bid Bond, Payment Bond,
Performance Bond, or Ancillary Bond:
(1) $9 million (as adjusted for inflation in accordance with 41
U.S.C. 1908);
(2) $14 million if a contracting officer of a Federal agency
certifies, in accordance with section 115.12(e)(3), that such guarantee
is necessary; or
(3) if SBA is guaranteeing the bond in connection with a
procurement related to a major disaster pursuant to section 12079 of
Public Law 110-246, see section 115.12(e)(4).
0
3. Amend Sec. 115.12 by revising paragraph (e)(3) to read as follows:
Sec. 115.12 General program policies and provisions.
* * * * *
(e) * * *
(3) Federal Contracts or Orders in excess of $9,000,000 (as
adjusted for inflation in accordance with section 1908 of title 41,
United States Code). SBA is authorized to guarantee bonds on Federal
Contracts or Orders greater than $9,000,000 (as adjusted for inflation
in accordance with 41 U.S.C. 1908), but not exceeding $14 million, upon
a signed certification of a Federal contracting officer that the SBA
guarantee is necessary. The certification must be either express mailed
to SBA, Office of Surety Guarantees, 409 Third Street SW, Washington,
DC 20416 or sent by email to <a href="/cdn-cgi/l/email-protection#b4c7c1c6d1c0cdd6dbdad0c7f4c7d6d59ad3dbc2"><span class="__cf_email__" data-cfemail="196a6c6b7c6d607b76777d6a596a7b78377e766f">[email protected]</span></a>, and include the
following additional information:
(i) Name, address and telephone number of the small business;
(ii) Offer or Contract number and brief description of the
contract; and
(iii) Estimated Contract value and date of anticipated award
determination.
* * * * *
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
4. The authority citation for Part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, 694a(9),
and 9012.
0
5. Amend Sec. 121.301 by revising paragraphs (a), (b), (b)(2), and (e)
to read as follows:
Sec. 121.301 What size standards and affiliation principles are
applicable to financial assistance programs?
* * * * *
(a) For Business Loans (other than for 7(a) Business Loans)) and
for Disaster Loans (other than physical disaster loans), an applicant
business concern must satisfy two criteria:
* * * * *
(b) For 7(a) Business Loans and Development Company programs, an
applicant business concern must meet one of the following standards:
(1) * * *
(2) Including its affiliates, tangible net worth not in excess of
$20 million, and average net income after Federal income taxes
(excluding any carry over losses) for the preceding two completed
fiscal years not in excess of $6.5 million. * * *
* * * * *
(e) The applicable size standards for purposes of SBA's financial
assistance programs, excluding the Surety Bond Guarantee assistance
program, are increased by 25% whenever the applicant agrees to use all
of the financial assistance within a labor surplus area. The U.S.
Department of Labor (DOL) issues the Labor Surplus Area (LSA) list on a
fiscal year basis on its website at <a href="http://www.dol.gov/agencies/eta/lsa">www.dol.gov/agencies/eta/lsa</a>.
* * * * *
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-15899 Filed 7-27-23; 8:45 am]
BILLING CODE 8026-09-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.