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The U.S. Small Business Administration (SBA) has determined that changing conditions in the American economy and a constantly evolving small business community compel it to seek ways to improve program efficiency for its Surety Bond Guarantee (SBG) Program, and the business loan programs consisting of the 7(a) Loan Program, the Business Disaster Loan Programs  (the Economic Injury Disaster Loans, Reservist Injury Disaster Loans, Physical Disaster Business Loans, Immediate Disaster Assistance Program loans), the Microloan Program, and the Development Company Program (the 504 Loan Program).  As a result, SBA proposes to simplify guidelines for determining affiliation for eligibility based on size as it relates to these programs.  This proposed rule would redefine affiliation for all five Programs, thereby simplifying eligibility determinations.

Statement of Need:

The U.S. Small Business Administration (SBA) has determined that changing conditions in the American economy and a constantly evolving small business community compel it to seek ways to improve program efficiency for its Surety Bond Guarantee ("SBG") Program, and the business loan programs consisting of the 7(a) Loan Program, the Economic Injury Disaster Loan ("EIDL") Program, the Microloan Program, and the Development Company Program (the "504 Loan Program").  

SBA’s surety bond and business loan programs are dedicated to providing solutions to qualified small businesses unable to secure conventional financing or surety bonding through traditional channels. Receipt of this form of SBA assistance includes program qualifications surrounding the size of a small business applicant. The proposed regulations set forth affiliation principles more in keeping with the capital structures presented in the surety and business loan programs.

Summary of the Legal Basis:

Executive Order 13563, "Improving Regulation and Regulatory Review," provides that agencies "must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends." (Emphasis added). Executive Order 13563 further provides that "[t]o facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned." (Emphasis added).

SBA has reviewed its regulations with regard to the business loan programs and Surety Bond Guarantee program and is proposing a number of amendments and revisions to accomplish this goal. The loan programs authorized by the Small Business Act (Act), 15 U.S.C. 631 et seq., that are affected by this proposed rule are: (1) the 7(a) Loan Program authorized by section 7(a) of the Act, (2) the Economic Injury Disaster Loan ("EIDL") Program authorized by section 7(b) of the Act, and (3) the Microloan Program authorized by section 7(m) of the Act. The 504 Loan Program, which is authorized by Title V of the Small Business Investment Act of 1958 (the "SBIA"), as amended, 15 U.S.C. 695 et seq., is also affected. This rule also proposes revisions to the Surety Bond Guarantee ("SBG") Program, authorized by section 411 of the SBIA.

Alternatives:

SBA first considered retaining the existing principles used to evaluate the size of a small business. It rejected that alternative arguing that a strict interpretation of these existing rules extends indiscriminate harm to small business growth and economic development.  SBA also considered proposing a different regulation on size exclusively for the surety and business loan program.  It rejected this alternative recognizing the merits behind many of the other standards in the current regulations.

In these proposed rules, SBA proffers that the size a of small business applicant with diffused ownership or operating under franchise or license agreements should be determined eligible without aggregating minority ownership interests, common investments or by reference to an affiliate’s  relationship to any franchisor or licensor.

Anticipated Costs and Benefits:

This will ultimately reduce the costs of submitting an application for the loan applicant and its participating lender.  By eliminating or modifying certain affiliation principles for the Business Loan Programs, this proposed rule would also significantly reduce the burden on loan applicants to provide additional documentation evidencing that they are eligible for SBA loan assistance.

Risks:

This action introduces a form of regulatory risk associated with considering applicants currently unable to receive SBA financial assistance. It is, however, inequitable to disregard a small business because its distributed ownership or an affiliate’s franchise or licensing agreement compels SBA to aggregate unrelated entities for determining a small concern’s size.  Making these types of businesses eligible for SBA assistance would expand our mission of providing this vital source of assistance to small business.  This additional assistance would serve to reduce reputational risk associated with SBA’s efficacy as a federal program truly committed to needs of the small business community.