Small Business Socioeconomic Status: What You Need to Know
The federal government mandates that 23% of its contracts be awarded to small businesses, which is certainly appealing for companies that wouldn’t otherwise have a chance at winning these contracts. However, small businesses first have to establish that they fit into a specific socioeconomic status before they’re eligible to bid on these set-aside federal contracts. This is a lengthy process, but worth the effort for small businesses who want a real shot at winning federal contracts.
Small business socioeconomic status and the SBA (Small Business Administration)
In order to register for a particular socioeconomic status, a business would have to follow the SBA’s guidelines. The SBA determines which businesses are eligible for socioeconomic set-aside contracts, and also enforces regulations for businesses that are already a part of these programs. Some of the main socioeconomic programs from the SBA include
The 8(a) Business Development Program
The HUBZone (Historically Underutilized Business Zone) program
The SDVOSB (Service-Disabled, Veteran-Owned Small Business) program
The WOSB (Women-Owned Small Business) program
Who is eligible for small business socioeconomic status?
First of all, the organization would have to qualify as a small business. The SBA sets size standards, which define the maximum size for a company to be considered “small”. In general, manufacturing companies should have 500 employees or less, and non-manufacturing companies should have annual receipts of under $7.5 million to be considered small. This can be established when a business gets its NAICS code, which looks at these criteria when assigning size standards.
If the company qualifies as a small business according to its NAICS code, the next step is to see if they meet the requirements for the SBA’s socioeconomic programs. Some of these programs target a relatively small group of people, like the SDVOSB program. Others have a broader focus, like the 8(a) Business Development program. What they all have in common, though, is that at least 51% of the company must be owned, operated, and controlled by at least one disadvantaged individual. The disadvantage could come from social or economic causes, gender, disability status, or other reasons. The point is that gaining small business socioeconomic status can help them compete more successfully for federal contracts, leveling the playing field between them and much bigger companies.
The primary SBA socioeconomic programs
The SBA offers a few different socioeconomic programs for small businesses. They all pertain to different groups of people, but they also offer similar benefits. These include receiving financial, technical, and managerial support from the SBA, and access to federal set-asides. These are the main programs to consider.
8(a) Business Development program
What is the SBA 8(a) Business Development Program? It’s a program that’s meant to build performance histories and develop business capabilities for small businesses. The 8(a) program gives access to set-aside contracts, as well as other advantages. For example, participating businesses can consider the pros and cons of the SBA’s Mentor-Protégé Program (MPP). This program connects small businesses with more established ones in a mentor-protégé relationship. Small businesses can benefit from training, access to greater resources, boosted growth, and more. This not only gives them more opportunities to win larger contracts, but also prepares them for future growth after they’ve completed the program.
To qualify for the 8(a) program, a business has to prove the following.
It can’t have previously joined the program
It must qualify as a small business
At least 51% of it should be owned and managed by economically and socially disadvantaged US citizens
The owner should be in charge of both day-to-day and long-term decisions
The owner’s average adjusted gross income over a three-year period should be $250,000 or under
The owner should have a personal net worth of $250,000 or under
The owner can’t have over $4 million in assets
The business must show potential for growth and success
It has to be able to complete contracts successfully
The principals have to demonstrate sound character
HUBZone program
This program is for small businesses located in “historically underutilized business zones”. In other words, these businesses may have the potential for success, but their location puts them at a disadvantage. These are the criteria for a business that wants to join the SBA’s HUBZone program.
It must qualify as a small business
Its main office must be within a HUBZone
At least 35% of employees should live within a HUBZone
At least 51% of it should be owned and managed by US citizens
How is a HUBZone determined? It’s an area that’s located in at least one of the following:
Land that falls within the boundaries of a federally established Indian reservation
A non-metropolitan county, as defined by the Internal Revenue Code of 1986, section 143(k)(2)(B). This means that it must have unemployment rates of at least 140% of the state average, or an average household income of under 80% of the state average
A qualified census tract, as defined by the Internal Revenue Code of 1986, section 42(d)(5)(C)(i)(I)
SDVOSB program
The SDVOSB (Service-Disabled Veteran-Owned Small Business) program shouldn’t be confused with the SBA’s VOSB (Veteran-Owned Small Business) program. They both offer business development benefits, but the VOSB program doesn’t include access to federal set-asides. To qualify for the SDVOSB program, a business must satisfy the following criteria.
It must qualify as a small business
At least 51% of it should be owned and managed by one or more service-disabled veterans
At least one service-disabled veteran should be in charge of both day-to-day and long-term decisions
The veterans’ disabilities should be connected to their service in the military
WOSB program
The SBA’s WOSB program is designed to facilitate and strengthen women-owned businesses. It works similarly to other socioeconomic programs, by providing various kinds of crucial assistance, and bringing access to set-aside federal contracts. To join the WOSB program, a business has to meet these criteria.
It must qualify as a small business
At least 51% of it should be owned and managed by women (who should also be US citizens)
A woman should be in charge of both day-to-day and long-term decisions
How difficult is it to apply for small business socioeconomic status?
Even if a business easily qualifies for one of the SBA’s socioeconomic programs, it won’t be so easy to submit an application and navigate the subsequent red tape. The process involves several steps, some of which are more complicated than others. If the applicant unknowingly makes a mistake (or several) on their application, this could cost them a spot in the program. The SBA’s regulations are complex, and most small business owners don’t realize how many of them there are to follow.
This isn’t to say that getting into these programs isn’t worth the effort. However, without a consultant who understands the process, the odds are certainly stacked against the typical small business owner. It’s important to submit a strong application the first time, since appealing a rejection from the SBA is even harder than succeeding with an initial application. Even though using a consultant doesn’t guarantee a positive result, it certainly raises a business’ chances of being accepted into one of the SBA’s socioeconomic programs.
Can a small business be terminated from one of these programs?
If everything goes well, participation in these programs will last for a set number of years (this varies from one program to another). If the SBA determines that a participant has failed to maintain their business according to regulations, or committed some other statutory violation, they could be terminated from the program. Each small business is audited regularly to ensure compliance, which provides motivation to meet goals and take advantage of the resources provided.
Even so, some businesses end up being terminated for what they feel are unjust causes. When this happens, they can submit an appeal (together with relevant documentation) to try and reverse the decision. Just like with the application process, it’s important to get the appeal right the first time. It’s also strongly recommended to use expert help – in this case, a lawyer.
The benefits of applying for an SBA socioeconomic program
Without being a part of one of these programs, most small businesses would find it nearly impossible to win federal contracts. Under normal circumstances, they would have to bid against much bigger companies. They wouldn’t have the same level of experience as many of their competitors, let alone the resources. As small businesses in one of the SBA’s socioeconomic programs, though, they would be able to bid on set-aside contracts. Instead of competing against industry giants, they would mainly have to compete with other small businesses of a similar socioeconomic status.
These programs also give small businesses access to dedicated resources from the SBA. From education, to mentoring, to networking opportunities, these resources are designed to help small businesses keep growing even after graduating from any of these programs. Plus, the 8(a) program also offers additional opportunities like the Mentor-Protégé program. Regardless of which socioeconomic category a small business falls into, they can pursue much better opportunities that can help them find both short-term and long-term success.