Effective May 11, 2023, the Small Business Administration (SBA) is amending various regulations governing its Capital Access loan programs which were created to bridge the financing gap in private markets to help small businesses start and grow. Among these changes, the SBA is simplifying criteria for determining affiliation in the 7(a) Loan Program, 504 Loan Program, Microloan Program, ILP Program, SBG Program, and Business Disaster Loan Programs. Affiliation is generally determined by an entity’s ability to directly or indirectly control another, whether or not the control is exercised. This is significant because if affiliation is determined, it precludes a small business from maintaining its small business status and therefore precludes the business from the Capital Access loan programs.
Currently, the SBA can find affiliation based on stock ownership; stock options, convertible securities, or agreements to merge; common management; identity of interest between individuals or businesses, including family members; the newly organized concern rule; common investments or economic dependence; joint venture agreements; prime and sub-contract relationships where the subcontractor is determined to be an ostensible subcontractor and is not a similarly situated entity; a franchise or license agreement; or the totality of the concern’s specific circumstances.
The new regulations remove the principle of control of one entity over another from determinations of affiliation, reflecting the SBA’s belief that “the concept of control as it exists requires understanding and expert consideration of business entity relationships well beyond what is owned by the applicant business or its owners.” Under the new regulations, affiliation will not arise from management and control, franchise or license agreements, or identity of interest. Additionally, the SBA will no longer be publishing a franchise directory.
The amendments can be found in 13 CFR 121.301(f), and begin with the addition of a new introductory paragraph:
The Small Business Act defines a small business concern as one which is independently owned and operated, and which is not dominant in its field of operation. SBA interprets this statutory definition to require, in certain circumstances, the inclusion of other entities (“Affiliates”) owned by the applicant or an owner of the applicant in determining the size of the applicant.
Additionally, the SBA amendments:
- Expand f(1) from a single paragraph to seven discrete sections;
- In paragraph f(1)(vii), codify a pre-existing SBA requirement that applicant owners identify which owners are required to guarantee a loan under the 20% ownership rule;
- Amend f(2)(iv) to: “SBA will not give present effect to individuals’, concerns’, or other entities’ ability to divest all or part of their ownership interest to avoid a finding of affiliation;” and
- Remove the previously-cited f(3) through f(5) in their entirety.
These changes streamline a small business concern’s application to the loan programs by no longer requiring that they engage in in-depth analyses of contractual relationships that may be necessary for the concern to operate. Additionally, small business concerns can now enter into service agreements with management companies without worrying about the effects the decision may have on their eligibility for these SBA loans.
The SBA expects the amendments to increase the overall number of loans made annually while reducing the SBA’s processing time per loan.
Importantly, the changes in affiliation determinations do not apply for the purposes of bidding or performing federal contracts, nor do they apply to other SBA programs such as the COVID EIDL Disaster Loan Program or the 8(a) Business Development Program. Therefore, the traditional affiliation rules still apply.
For more information, please contact Michael Zisa at 202.293.8815