SBA Reassesses Disadvantaged Business Program Following Federal Court Verdict

There’s been a significant change for small business owners looking to benefit from the Small Business Administration’s (SBA) disadvantaged business program.

Following a recent federal court ruling, the Small Business Administration (SBA) has halted adding new entrants to its disadvantaged business program. The U.S. District Court for the Eastern District of Tennessee decided last month that the SBA couldn’t automatically categorize a small business as disadvantaged based on the race or ethnicity of its owner when applying for the agency’s 8(a) business development program.

The 8(a) program traditionally benefits businesses by earmarking certain federal contracts for them. A primary goal of the Biden administration is to allocate a more significant fraction of government contracting dollars to these disadvantaged entities. However, this court ruling may place a temporary roadblock in that endeavor.

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Before the court’s decision, the SBA operated under the presumption that if a small business owner identified as part of a racial or ethnic minority, their business automatically qualified as socially disadvantaged, making it eligible for the 8(a) program. Robert Tompkins, a significant figure in national government contract practice, elucidated that the court found this generalization too vast. Tompkins explained that now, each business owner will need to provide specific evidence of facing social disadvantages.

The genesis of this landmark ruling was a lawsuit initiated by Ultima Services Corporation, a woman-led small business. Ultima alleged racial discrimination when the Agriculture Department moved its preceding contract into the 8(a) program. The shift meant that, without 8(a) certification, Ultima could no longer compete for that contract.

The court’s decision might have a ripple effect, potentially broadening the horizon for the 8(a) program. Antonio Franco, a law firm managing partner, suggested that the change would now compel all applicants, irrespective of their racial or ethnic group, to provide tangible evidence supporting their claim of social disadvantage.

Given the new mandates, small business owners may experience a deceleration in the SBA’s process of inducting new members into the 8(a) program. However, Thompkins reminded businesses that the SBA already possesses mechanisms for owners to establish their social disadvantages. Although this isn’t novel, this additional step will be a first-time experience for many.

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Existing businesses under the 8(a) program, which requires recertification every nine years, are now advised to compile evidence supporting their disadvantaged status. With these changes in play, Tompkins anticipates a potential drop in participants within the 8(a) scheme.

This court decision could also pose challenges to the Biden administration’s aspirations. President Biden set a goal in June 2021 to allocate 15% of all federal contracting expenses to small, disadvantaged businesses by 2025, a hike from the current target of 10%. Tompkins expressed reservations about meeting this target given the new requirements.

While the exact trajectory of the SBA’s revamped application process remains uncertain, one thing is clear: the landscape for disadvantaged business owners seeking federal contracts is changing. The upcoming court hearing later this month is expected to provide more clarity on the matter.

For small business owners, this news underscores the importance of staying updated with federal guidelines and understanding the nuances that can affect their potential to secure federal contracts.

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