SBA proposes changes to affiliation rule for business loan, surety bond guarantee programs

The U.S. Small Business Administration (SBA) is proposing revisions to its regulations for determining affiliation under its business-loan programs and surety bond guarantee program. 

These revisions are designed to “simplify” eligibility determinations and reduce costs and processing time, the SBA said.

SBA published the proposed revisions on Oct. 2 in the Federal Register. The comment period will be open until Dec. 1. 

SBA seeks comments from the public on the proposed rule and will consider the comments in its development of a final rule.

The proposed rule would apply to affiliation rules for SBA’s business-loan programs and the surety bond guarantee program, but would not apply to SBA government contracting, business development, or grant programs. 

The affected programs would include the 7(a) loan program, the agency said in a news release.

It would also impact the business-disaster loan programs, which include the economic-injury disaster loans, reservist-injury disaster loans, physical disaster business loans, and immediate disaster-assistance program loans. 

The programs would also include the microloan program, the development-company program (or what is known as the “504 loan program”), and the surety bond guarantee program (the SBG program).

Explanation

SBA is proposing amendments to the current affiliation rules regarding its business-loan programs, according to the language in the Federal Register. 

The agency believes that, “in general,” a majority of the principles of affiliation in the current regulations apply to the business-loan programs. 

However, SBA believes that certain affiliation principles in their current form are “more applicable” to determining size in federal contracting and subcontracting and are “not necessarily” applicable to business-loan applicants. 

SBA seeks to create “simple, bright-line tests” for business-loan program applicants when determining eligibility in relation to size and affiliation, and to “streamline requirements” for determining whether a business is small for purposes of receiving SBA loan assistance. 

In addition to clarification, this will “reduce costs” of an application for the loan applicant and its participating lender, the agency contends.

Ownership

As presented in the Federal Register, the SBA’s proposed new paragraph sets forth the affiliation principles based on percentage of ownership. 

SBA’s current affiliation rule sets forth a minority-shareholder standard stating that when no one person owns more than 50 percent of a company, SBA will find that the person or persons who directly or indirectly own an interest in the business “no less than the ownership of the next largest owner” is deemed to control the small business. 

In addition, if the ownership of a business is widely held and no ownership interest is a large single block of stock as compared to any other, then the board of directors and president or CEO are deemed to control the business, unless they can present evidence showing otherwise.

SBA’s current affiliation rule says that if two or more persons own, control, or have the power to control less than 50 percent of the company’s voting interests, and the interests are equal, or approximately equal in size, and these minority holdings are as large as compared with any other holding, then the SBA presumes these owners have control of the business.

For purposes of the business-loan programs, however, SBA considers that in all of these instances, the holdings are so diffused that control would always rest with the board of directors or management of the small business since it is that unit of the organization that is “truly running the business,” according to the Federal Register.

SBA proposes that for the business-loan programs, the agency will determine control exists based on ownership when a person owns, or has the power to control, more than 50 percent of the voting equity of the company. 

If no one person owns or has the power to control more than 50 percent of the voting equity of the firm, then SBA would deem the president, chairman of the board, or CEO has control of the small business.

Franchise agreements

SBA also proposes making one change to the existing language affecting affiliation based on franchise and license agreements.

Under the current language, SBA must review franchise agreements pertaining to both the applicant and any affiliates of the applicant. 

If the applicant has an affiliate that operates under a franchise or license agreement, SBA would be required to review the franchise agreements regarding the affiliate to determine the size of the applicant. 

Therefore, if the affiliate entity was operating under a franchise agreement that gave the franchisor control over the affiliate franchisee, SBA would determine that the affiliate entity is affiliated with the franchisor. 

Based on this analysis, when the size of the affiliate entity and the franchisor are combined with the size of the applicant, the applicant may no longer be considered a small business eligible for SBA loan programs.

The proposed regulation would limit franchise or license-agreement reviews to the immediate loan applicant, and not consider other agreements in place with affiliated entities.

Surety bond guarantee program

For the surety bond guarantee program, SBA has proposed amending the definition of “Affiliate” in the surety bond guarantee regulation to explain that the term is defined in the proposed small-business size regulations, or the loan programs’ definition of affiliation, according to the Federal Register.