The Small Business Administration (SBA) has changed its policies again in recent years, and smaller businesses seeking federal and local contracts will feel the impact once more. Here are some of the top changes proposed by the SBA:

Changes to Small Business Size Standards

The most important proposed change involves the SBA’s small business size standard. The SBA is restructuring business classification from revenue-based standards to employee-based standards. 

For construction-based companies, under the earlier framework, organizations with annual revenue between $19 and $45 million could qualify as a small business. Under the proposed change, the metric has shifted to employee-based standards across the industry, with new size standards ranging from 550 to 2,000 employees.

This means large companies can now qualify as “small business” in federal contracting.

Another change increases most revenue-based North American Industry Classification System (NAICS) standards. For example, NAICS 541310, Architectural Services, has seen a 980% increase in standard size from the current $12.5 million to $135 million.

The new restructuring will help small- to mid-sized companies compete for small-business set-asides. Conversely, this also puts pressure on smaller firms, who would need to compete against organizations with more employees, larger resources, and revenue. However, this could also open up opportunities for small-business mergers and acquisitions, making these firms high-value targets.

Clarity Over 8(a) Rule

The SBA previously proposed amending the 8(a) rule for classifying Disadvantaged Business Enterprises, and the final amendments respond to the court decision in Ultima Servs. Corp. v. U.S. Dep’t of Agric ruling.  

The SBA has clarified that it never intended to “exclude any evidence-based bases of individual racial prejudice or cultural bias,” and it most certainly “could include discrimination or bias based on sex.”

Under the current revised qualification, applicants must be an American citizen during their lifetime, and must prove their social disadvantage through either of the two processes:

• Provide evidence that a governmental or private organization (federal/state/local or university/organization) has taken any action, policy, rule, regulation, or practice that adversely affected the applicant’s group.
• Self-certify that the individual was a member of a particular group during a relevant time frame of disfavored policy/practice and that they suffered material harm because of it.

In both cases, the individual must prove that they faced a loss of economic opportunities due to discrimination. 

For DBE, this new rule by the SBA will soon be followed by the resumption of decisions on pending 8(a) applications. The SBA can return any pending applications to the applicant for updated information.

SBA 7(a) Reshapes Business Acquisition

The US Small Business Administration announced a Standard Operating Procedure (SOP), which will become effective on October 1st. The following changes were proposed:

• SBA financing is available only to US citizens or nationals with a primary residence in the country. Any parent entity must also be based in the United States. 
• The minimum Debt-Service Coverage Ratio (DSCR) for a change-of-ownership transaction has been increased from 1.15x to 1.25x. This indicates that historical cash flow will have more weight over future projections. 
• The underwriting requirements will undergo transformation for standard 7(a) loans (over $350,000) and 7(a) small loans. All acquisitions will be treated as a standard 7(a) transaction, and both lender and buyer will be subjected to a full credit memorandum, independent evaluation, site visit, and historical cash-flow test. 
• A formal Quality of Earnings (QoE) report, in addition to an independent evaluation, is required for acquisitions with a purchase price of $ 3 million or more. 
• The new changes require a minimum of 10% equity injection for transactions like partner buyouts and business expansion.

These updates will change how small businesses qualify, compete, and access federal funds.