[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Proposed Rules]
[Pages 48739-48760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15899]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 88 , No. 144 / Friday, July 28, 2023 / 
Proposed Rules  

[[Page 48739]]



SMALL BUSINESS ADMINISTRATION

13 CFR Parts 115 and 121

RIN 3245-AG16


Small Business Size Standards: Adjustment of Alternative Size 
Standard for SBA's 7(a) and CDC/504 Loan Programs for Inflation; and 
Surety Bond Limits: Adjustments for Inflation

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Small Business Administration (SBA or Agency) 
proposes to amend its Small Business Size Regulations to increase the 
alternative size standard for its 7(a) Business and Certified 
Development Company (CDC/504) Loan Programs (collectively ``Business 
Loan Programs'') by 34.46% to account for inflation that has occurred 
since the size standard's establishment in 2010. The inflation 
adjustment would increase the size standard's level for tangible net 
worth to $20 million and for net income to $6.5 million. SBA also is 
adjusting for inflation the applicable statutory limits for contract 
size under the Surety Bond Guarantee (SBG) Program. The adjustment 
would increase the contract limit to $9 million and to $14 million for 
Federal contracts if a Federal contracting officer certifies that such 
a guarantee is necessary.

DATES: SBA must receive comments to this proposed rule on or before 
September 26, 2023.

ADDRESSES: Identify your comments by RIN 3245-AG16 and submit them by 
one of the following methods: (1) Federal eRulemaking Portal: 
www.regulations.gov. Follow the instructions for submitting comments; 
or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Office 
of Size Standards, 409 Third Street SW, Mail Code 6530, Washington, DC 
20416.
    SBA will post all comments to this proposed rule on 
www.regulations.gov. If you wish to submit confidential business 
information (CBI) as defined in the User Notice at www.regulations.gov, 
you must submit such information to U.S. Small Business Administration, 
Khem R. Sharma, Ph.D., Chief, Office of Size Standards, 409 Third 
Street SW, Mail Code 6530, Washington, DC 20416, or send an email to 
[email protected]. Highlight the information that you consider to 
be CBI and explain why you believe SBA should hold this information as 
confidential. SBA will review your information and determine whether it 
will make the information public.

FOR FURTHER INFORMATION CONTACT: Khem Sharma, Ph.D., Chief, Office of 
Size Standards, (202) 205-6618 or [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background for Small Business Size Standards

    To determine eligibility for Federal small business assistance, SBA 
establishes small business size definitions (usually referred to as 
``size standards'') for private sector industries in the United States. 
SBA uses two primary measures of business size for size standards 
purposes: average annual receipts over the last five years (either 
three years or five years for SBA financial assistance programs) and 
average number of employees over the last 24 months. In addition, SBA's 
Small Business Investment Company (SBIC), Certified Development Company 
(CDC/504), and 7(a) Loan Programs use either the industry-based size 
standards (i.e., average annual receipts or average number of 
employees), or tangible net worth and net income-based alternative size 
standards to determine eligibility for those programs.
    On September 27, 2010, the Small Business Jobs Act of 2010 (``Jobs 
Act'') was enacted (Pub. L. 111-240). Section 1116 of the Jobs Act 
added a new Section 3(a)(5) to the Small Business Act that directed SBA 
to establish an alternative size standard using maximum tangible net 
worth and average net income for applicants of the SBA's 7(a) Business 
and CDC/504 Loan Programs (collectively ``Business Loan Programs''). 
The Jobs Act also established for applicants for the SBA's Business 
Loan Programs an interim alternative size standard of not more than $15 
million in tangible net worth and of not more than $5 million in the 
average net income after Federal income taxes (excluding any carry-over 
losses) of the applicant for the two full fiscal years before the date 
of the application (referred to as ``Interim Rule''). Under the Jobs 
Act, this interim statutory alternative size standard would remain in 
effect until such time as SBA has established a new alternative size 
standard for the Business Loan Programs through rulemaking. 15 U.S.C. 
632(a)(5). Prior to that, SBA employed a lower regulatory alternative 
size standard that applied to the CDC/504 Loan Program, and applied 
temporarily to the 7(a) Loan Program for the period beginning on May 5, 
2009, and ending on September 30, 2010. 13 CFR 120.301(b)(2).
    On September 29, 2010, SBA issued Information Notice 5000-1175 
(available at https://www.sba.gov/sites/default/files/files/bank_5000-1175_0.pdf) providing that, effective September 27, 2010, the new 
statutory alternative size standard applied to its Business Loan 
Programs, thereby replacing and superseding the lower existing 
alternative size standard of $8.5 million in tangible net worth and $3 
million in average net income, as set forth in 13 CFR 121.301(b)(2). 
The Information Notice further stated that the new statutory 
alternative size standard would remain in effect until such time as SBA 
has established a permanent alternative size standard for the Business 
Loan Programs through rulemaking. The Information Notice also stated 
that the SBA's disaster loan program, surety bond guarantee program, 
SBIC program, and small business development and contracting programs, 
as well as other Federal programs utilizing SBA's industry-based size 
standards were not affected by the interim statutory alternative size 
standard, and the current standards for those programs in 13 CFR part 
121 remained in effect.
    SBA has not established an alternative size standard for its 7(a) 
and CDC/504 Loan Programs in its regulations. Thus, the Agency 
continues to use the interim statutory alternative size standard to 
determine eligibility for a small business concern under SBA's Business 
Loan Programs, in addition to using the industry-based size standards. 
A loan applicant is eligible either under its industry-based size 
standard or if it

[[Page 48740]]

meets the statutory alternative size standard of $15 million in 
tangible net worth and $5 million in average net income. However, due 
to the lack of rulemaking to codify these levels, SBA's current 
regulations at 13 CFR 120.301(b)(2) continue to show the tangible net 
worth of $8.5 million and net income of $3 million that existed prior 
to the enactment of the interim statutory alternative size standard.
    A review of SBA's internal data on its Business Loan Programs for 
fiscal years 2021-2022 shows that the interim statutory alternative 
size standard may have enabled some small businesses that were not 
otherwise eligible under their industry-based size standards to receive 
7(a) or CDC/504 Loans (``Business Loans''). However, SBA's internal 
data systems for its Business Loan Programs lack the necessary detailed 
electronic data that would allow for an assessment of the exact impact 
of the interim statutory size standard on small business loan 
applicants. Since the Agency's electronic systems only include data 
regarding the number of employees, the NAICS industry, and approved 
loan amount for each SBA loan recipient, but not the data regarding 
average annual receipts, tangible net worth, average net income, or 
whether the loan was approved under the industry or alternative size 
standard, SBA cannot easily calculate the exact number of businesses 
that qualified under the interim statutory alternative size standard 
that otherwise could not have qualified under their industry-based size 
standards. Similarly, due to the lack of data, SBA cannot easily 
identify industries or industry sectors in which the statutory 
alternative size standard helped small businesses the most or the least 
in accessing SBA Business Loans.
    In accordance with its regulations, SBA is required to assess the 
impact of inflation on its monetary-based size standards at least once 
every five years (67 FR 3041; January 23, 2002) and 13 CFR 121.102(c)). 
Accordingly, except for the statutory alternative size standard for the 
SBA Business Loan Programs, SBA adjusted its monetary-based size 
standards for inflation three times since the Congress enacted the 
Interim Rule in 2010.\1\ In its rulemaking for each adjustment, SBA 
provided that the statutorily set alternative size standard will remain 
in effect until SBA establishes a permanent alternative size standard 
for the SBA Business Loan Programs. Based on the GDP price index, 
inflation has increased more than 34% since the enactment of the 
statutory alternative size standard. This has eroded the value of the 
alternative size standard in real terms. SBA has an important policy 
objective of maintaining the value of monetary-based size standards in 
real (i.e., inflation-adjusted) terms, and by adjusting the statutory 
alternative size standard for inflation. This rulemaking fulfils that 
objective. Additionally, one of the comments SBA received to its joint 
interim and final rule on inflation adjustment of monetary-based size 
standards, published on November 17, 2022 (87 FR 69118), urged SBA to 
immediately adjust for inflation the statutory alternative size 
standard for SBA's 7(a) and CDC/504 Loan Programs and to include it in 
future inflation adjustments of monetary size standards.
---------------------------------------------------------------------------

    \1\ Small Business Size Standards: Inflation Adjustment to 
Monetary Based Size Standards (Interim Final Rule) (79 FR 33647; 
June 12, 2014), finalized on January 25, 2016 (81 FR 3949); Small 
Business Size Standards: Adjustment of Monetary-Based Size Standards 
for Inflation (Interim Final Rule) (84 FR 34261; July 18, 2019), 
finalized on November 17, 2022 (87 FR 69118); Small Business Size 
Standards: Adjustment of Monetary-Based Size Standards, Disadvantage 
Thresholds, and 8(a) Eligibility Thresholds for Inflation (Joint 
Final and Interim Rule) (87 FR 69118; November 17, 2022).
---------------------------------------------------------------------------

    As stated earlier, due to the lack of relevant data, SBA is also 
not in a position to easily determine whether levels of tangible net 
worth and net income of the statutory alternative size standard are 
appropriate under the current economic environment. For the same 
reason, SBA is unable to develop an analysis to support the creation of 
a different permanent alternative size standard based on tangible net 
worth and average net income. The Economic and Agricultural Census data 
that SBA examines to establish the industry-based size standards does 
not contain information on tangible net worth or average net income by 
industry. Furthermore, while SBA collects and maintains limited 
relevant electronic data on each of the applicants for its Business 
Loan Programs (such as NAICS industry code, the number of employees, 
and approved loan amount), SBA's electronic data systems for Business 
Loan Programs do not maintain the data on average annual receipts, 
tangible net worth, average net income, and on whether an applicant for 
its Business Loan Programs was determined to be eligible under its 
industry based size standard or under the statutory alternative size 
standard. Similarly, the electronic data does not include information 
on the numbers or amounts of loan approvals that were issued under the 
industry-based size standard or under the interim statutory alternative 
size standard.

II. Background for Surety Bond Contract Limits

    SBA is amending the contract limits applicable to its Surety Bond 
Guarantee (SBG) Program. The SBG Program is designed to increase small 
business' access to Federal, state, and local government contracting, 
as well as private-sector contracting, by guaranteeing bid, payment, 
and performance bonds on contracts for small and emerging contractors 
who cannot obtain surety bonds through regular commercial channels.\2\ 
Surety bonds are important to small businesses interested in competing 
for Federal contracts because the Federal Government requires prime 
contractors, prior to the award of a Federal contract exceeding 
$150,000 for the construction, alteration, or repair of any building or 
public work of the United States, to furnish a performance bond issued 
by a surety satisfactory to the officer awarding the contract, and in 
an amount the contracting officer considers adequate, to protect the 
government.
---------------------------------------------------------------------------

    \2\ A surety bond is a three-party instrument between a surety, 
a contractor, and a project owner. The agreement binds the 
contractor to comply with the contract's terms and conditions. If 
the contractor is unable to successfully perform the contract, the 
surety assumes the contractor's responsibilities and ensures that 
the project is completed. The surety bonds reduce the risk of 
contracting. Surety bonds are viewed as a means to encourage project 
owners to contract with small businesses that may not have the 
credit history or prior experience of larger businesses and are 
considered to be at greater risk of failing to comply with the 
contract's terms and conditions.
---------------------------------------------------------------------------

    The Housing and Urban Development Act of 1970 (Pub. L. 91-609) 
authorized the SBA's SBG Program. The act amended Title IV of the Small 
Business Investment Act of 1958 (15 U.S.C. 694a et seq., as amended) to 
provide SBA authority to guarantee any surety against loss as the 
result of a breach of the terms of a bid bond, payment bond, or 
performance bond by a small business. SBA's guarantee gives Sureties an 
incentive to provide bonding for small businesses and thereby assists 
small businesses in obtaining greater access to contracting 
opportunities. Based on the data for fiscal years 2021-2022, the SBG 
Program assists about 1,700 small businesses annually.\3\ The program 
guarantees individual contracts of up to $6.5 million, and up to $10 
million for Federal contracts if a Federal contracting officer 
certifies that such a guarantee is necessary. The $6.5 million limit 
should be periodically adjusted for

[[Page 48741]]

inflation in accordance with 41 U.S.C. 1908. SBA's guarantee is an 
agreement between a Surety and SBA that SBA will assume a certain 
percentage of the Surety's loss should a contractor default on the 
underlying contract. The SBA's guarantee currently ranges from 80% to 
90% of the Surety's loss if a default occurs. For more information 
about SBA's Surety Bond Guarantee Program, see https://www.sba.gov/funding-programs/surety-bonds.\4\
---------------------------------------------------------------------------

    \3\ U.S. Small Business Administration (SBA), FY 2024 
Congressional Budget Justification and FY 2022 Annual Performance 
Report, p. 44, https://www.sba.gov/sites/sbagov/files/2023-03/FY%202024%20SBA%20Congressional%20Budget%20Justification-2023-0313_0.pdf.
    \4\ Also see a July 8, 2022, Congressional Research Service 
Report on ``SBA Surety Bond Guarantee Program,'' available at 
https://crsreports.congress.gov/product/pdf/R/R42037.
---------------------------------------------------------------------------

    During fiscal years 2021-2022, SBA guaranteed 17,966 bid and final 
(i.e., a payment bond, performance bond, or both a payment and 
performance bond) surety bonds with a total contract value of about 
$13.1 billion and total bond value of about $8.3 billion. According to 
Table 1, Distribution of Number of Surety Bonds and Contract Value by 
Contract Size (FY 2021-2022), during fiscal years 2021-2022, contracts 
below $6.5 million accounted for 99.9% of total number of surety bonds 
and 99% of total contract value. That means that contracts between $6.5 
million and $10 million contributed to the limited bonding activity, 
accounting for just 0.1% of total surety bonds and 1% of total contract 
value.
    As stated earlier, the SBG Program is intended to increase small 
business' access to Federal, state, and local government contracting, 
as well as private-sector contracting by guaranteeing bid and final 
surety bonds. Table 2, Distribution of Surety Bonds, Contract Value, 
and Bond Value by Contract Type (FY 2021-2022), shows that State and 
Local Government contracting dominates the SBG program, accounting for 
72% of the number of surety bonds, 66.5% of total contract value, and 
51.7% of total bond value during fiscal years 2021-2022. The Federal 
Government contracting accounts for 11% of surety bonds, 15% of total 
contract value, and 18.1% of total bond value. For its part, private-
sector contracting accounts for 8.7% of surety bonds, 11.8% of contract 
value, and 25.5% of bond value.

                                   Table 1--Distribution of Number of Surety Bonds and Contract Value by Contract Size
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Number of surety bonds                              Contract value
                                                         -----------------------------------------------------------------------------------------------
                Contract size ($ million)                                                                    Value ($
                                                               Count             %            Cum. %         million)            %            Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
<0.1....................................................           2,092            11.6            11.6            $122             0.9             0.9
0.1 to 0.25.............................................           3,870            21.5            33.2             645             4.9             5.9
0.25 to 0.5.............................................           4,439            24.7            57.9           1,522            11.6            17.5
0.5 to 1.0..............................................           3,449            19.2            77.1           2,386            18.2            35.7
1.0 to 2.0..............................................           2,505            13.9            91.0           3,395            25.9            61.6
2.0 to 3.0..............................................             872             4.9            95.9           2,030            15.5            77.1
3.0 to 4.0..............................................             396             2.2            98.1           1,308            10.0            87.1
4.0 to 5.0..............................................             191             1.1            99.2             818             6.2            93.4
5.0 to 6.5..............................................             135             0.8            99.9             740             5.7            99.0
6.5 to 10.0.............................................              17             0.1           100.0             128             1.0           100.0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................          17,966           100.0  ..............          13,093           100.0  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                 Table 2--Distribution of Surety Bonds, Contract Value, and Bond Value by Contract Type
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Surety bonds                   Contract value                    Bond value
                                                         -----------------------------------------------------------------------------------------------
                      Contract type                                                          Amount ($                       Amount ($
                                                               Count             %           million)            %           million)            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal Government......................................           2,039            11.3          $1,983            15.1          $1,509            18.1
Local Government........................................           9,694            54.0           6,469            49.4           3,245            38.9
Private.................................................           1,558             8.7           1,541            11.8           2,127            25.5
Special Districts.......................................           1,377             7.7             784             6.0             316             3.8
State Government........................................           3,236            18.0           2,243            17.1           1,072            12.8
Other...................................................              62             0.3              72             0.6              78             0.9
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................          17,966           100.0          13,093           100.0           8,346           100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    SBA's guaranteed surety bonds fall in two categories: (1) bid 
bonds, and (2) final bonds, which consist of a payment bond, 
performance bond, or both a payment and performance bond. According to 
the SBG program data for fiscal years 2021-2022, bid bonds account for 
67.6% of total surety bonds and 70.7% of total contract value, but just 
22.3% of total bond value. Final bonds account for 32.4% of total 
bonds, 29.3% of total contract value, and 77.7% of total bond value. 
Average bond value for bid bonds is about $153,000, as compared to more 
than $1 million for final bonds. These results are provided in Table 3, 
Distribution of Surety Bonds, Contract Value, and Bond Value by Bond 
Type (FY 2021-2022).

[[Page 48742]]



                                   Table 3--Distribution of Surety Bonds, Contract Value, and Bond Value by Bond Type
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Number of bonds                 Contract value                    Bond value
                                                         -----------------------------------------------------------------------------------------------
                        Bond type                                                            Amount ($                       Amount ($
                                                               Count             %           billion)            %           billion)            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bid bonds...............................................          12,141            67.6            9.26            70.7            1.86            22.3
Final bonds.............................................           5,825            32.4            3.83            29.3            6.49            77.7
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................          17,966           100.0           13.09           100.0            8.35           100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The statutory surety bond contract limits have not been adjusted 
since enacted in 2013. Rising inflation costs have eroded the buying 
power of contractors. The average size of Federal contracts for 
construction increased 134% from about $400,000 in 2013 to more than $1 
million in 2022. Based on the SBG data for fiscal years 2021-2022, the 
construction sector accounted for more than 95% of total number of 
surety bonds, total contract value, and total bond amount. See Table 4, 
Distribution of Surety Bonds, Contract Value, and Bond Value by 
Business' NAICS Sector (FY 2021-2022), below. In this rule, SBA is 
amending the contract limits in its regulations to keep pace with 
inflation, which also will have the effect of keeping up with Federal 
contracting trends.

                             Table 4--Distribution of Surety Bonds, Contract Value and Bond Value by Business' NAICS Sector
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Number of bonds                 Contract value                    Bond value
                                                         -----------------------------------------------------------------------------------------------
           NAICS sector                 Sector title                                         Amount ($                       Amount ($
                                                               Count             %           million)            %           million)            %
--------------------------------------------------------------------------------------------------------------------------------------------------------
11................................  Agriculture,                       9             0.1             4.5             0.0             4.1             0.0
                                     Forestry, Fishing
                                     and Hunting.
21................................  Mining, Quarrying,                 5             0.0             2.6             0.0             2.4             0.0
                                     and Oil and Gas
                                     Extraction.
22................................  Utilities...........              24             0.1             9.1             0.1             3.6             0.0
23................................  Construction........          17,094            95.1        12,459.6            95.2         7,941.4            95.1
31-33.............................  Manufacturing.......             213             1.2           155.4             1.2            93.9             1.1
42................................  Wholesale Trade.....              12             0.1             7.0             0.1             6.4             0.1
44-45.............................  Retail Trade........               8             0.0             4.8             0.0             4.4             0.1
48-49.............................  Transportation and                 7             0.0             9.4             0.1            13.7             0.2
                                     Warehousing.
51................................  Information.........               2             0.0             1.9             0.0             1.0             0.0
53................................  Real Estate and                    1             0.0             2.5             0.0             2.5             0.0
                                     Rental and Leasing.
54................................  Professional,                    126             0.7            87.1             0.7            50.1             0.6
                                     Scientific, and
                                     Technical Services.
56................................  Administrative and               452             2.5           341.8             2.6           220.5             2.6
                                     Support and Waste
                                     Management and
                                     Remediation
                                     Services.
71................................  Arts, Entertainment,               3             0.0             0.7             0.0             0.1             0.0
                                     and Recreation.
72................................  Accommodation and                  3             0.0             0.8             0.0             0.4             0.0
                                     Food Services.
81................................  Other services......               6             0.0             5.4             0.0             1.9             0.0
NA................................  NA..................               1             0.0             0.2             0.0             0.0             0.0
                                                         -----------------------------------------------------------------------------------------------
    Total.........................                                17,966           100.0        13,092.8           100.0         8,346.4           100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

III. Analysis of Business Loan Data

    The only electronic data on the size of small business applicants 
approved for loans through the SBA Business Loan Programs available for 
review is the number of employees and the NAICS industry. In an effort 
to estimate the percentage of loans that were approved under the 
statutory alternative size standard, SBA examined its electronic 
internal data on its Business Loan Programs for fiscal years 2021-2022. 
During fiscal years 2021-2022, a total of 118,424 loans were issued

[[Page 48743]]

through SBA Business Loan programs, of which 84% were issued through 
7(a) Business Loan Program and 16% were dispersed through CDC/504 Loan 
Program. The loan amount through those programs totaled $79.64 billion, 
of which 82.6% was dispersed through 7(a) Program and 17.4% was 
dispersed through CDC/504 Program.
    As stated earlier, SBA's electronic systems for its business loan 
data do not keep the data on receipts, tangible net worth, and net 
income of applicants to its Business Loan Programs. Thus, to estimate 
receipts, tangible net worth, and net income for each loan recipient, 
SBA first converted the employment level of each SBA business loan 
recipient to receipts using the receipts-to-employees ratios from the 
special tabulations of the 2017 Economic Census (https://www.census.gov/econ/census/), 2017 Agricultural Census 
www.agcensus.usda.gov/), and 2017 County Business Patterns 
(www.census.gov/econ/cbp/). The receipts of each loan applicant thus 
estimated were then combined with the various financial ratios from the 
Risk Management Association (RMA) (https://rmau.org) to derive the 
estimates of tangible net worth and net income for each loan applicant 
using the following steps: \5\
---------------------------------------------------------------------------

    \5\ For this analysis, SBA utilized four financial ratios from 
RMA for years 2019-2021: (1) Net Sales/Total Assets; (2) Net Fixed 
Assets/Tangible Net Worth; (3) Net Sales/Net Fixed Assets; and (4) 
Profit Before Taxes/Tangible Net Worth. Here ``net sales'' is 
considered a proxy for receipts and ``profit before taxes a proxy'' 
for net income, subject to adjustment for taxes. Combining these 
ratios with receipts allowed the estimation of tangible net worth 
and net income for recipients to the SBA Business Loan Programs.
---------------------------------------------------------------------------

    Step 1: Estimate receipts equivalent of employment level for the i-
th loan recipient in the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.078

[GRAPHIC] [TIFF OMITTED] TP28JY23.079

    Step 2: Estimate net fixed assets (NFA) for the i-th loan recipient 
in the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.080

[GRAPHIC] [TIFF OMITTED] TP28JY23.081

    Step 3: Estimate tangible net worth (TNW) for the i-th loan 
recipient in the j-the industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.082

where TNWi,j is an estimate of tangible net worth of the i-th loan 
recipient in the j-the industry and (NFA/TNW)j is the net fixed assets 
to tangible net worth ratio in the j-th industry from RMA.

    Step 4: Estimate net income (NI) for the i-th loan recipient in the 
j-th industry.

[[Page 48744]]

[GRAPHIC] [TIFF OMITTED] TP28JY23.083

[GRAPHIC] [TIFF OMITTED] TP28JY23.084

    Step 5: Determine if a loan recipient meets an alternative size 
standard using the estimates of tangible net worth ( and average net 
income (NFA/TNWi,j) and the average net income (NIi,j).
whether the i-th applicant meets an alternative size standard:

{Meets if TNWi,j <=$15 million and NIi,j <=$5 million Does not meet if 
TNWi,j > $15 million or NIi,j>$5 million or both

    Excluding invalid observations (i.e., those with missing receipts 
to-job-ratios or missing one or more RMA ratios used to estimate values 
of tangible net worth and net income), 99.9% of SBA business loan 
recipients during fiscal years 2021-2022 were found to be at or below 
the statutory alternative size standard. However, the results do not 
allow for the estimation of the number of loans in which the lender 
applied the statutory alternative size standard to approve the loan 
application.\6\
---------------------------------------------------------------------------

    \6\ The SBA electronic business loan data only contains 
applicants that were approved for loans. Thus, the available data 
does not show the number of applicants that were denied for SBA 
loans based on their size eligibility.
---------------------------------------------------------------------------

    To assess the percentage of loan recipients that met the industry-
based size standard, SBA first converted all industry size standards to 
receipts equivalent size standards as follows: (i) If an industry has a 
receipt-based size standard, the receipts equivalent size standard is 
the receipts-based size standard itself; and (ii) If an industry has an 
employee-based size standard, the receipts equivalent size standard is 
obtained by multiplying the employee-based size standard (number of 
employees) by the ratio of small business receipts to small business 
number of employees for that industry. For each of the loan recipients, 
the receipts equivalent size standard for their industry was compared 
with their estimated receipts in Step 1 above. If an applicant's 
estimated receipts in Step 1 above was less than or equal to the 
receipts equivalent size standard for its industry, the applicant is 
deemed to have met the industry-based size standard. Conversely, if the 
applicant's estimated receipts was higher than its industry receipts 
equivalent size standard, the applicant is deemed to have exceeded the 
industry-based size standard.
    Mathematically,

whether the i-th applicant meets the industry-based size standard:
    {Meets if Receiptsi,j
    <= Receipts equivalent industry
    - based standard Does not meet if Receiptsi,j
    > Receipts equivalent industry-based standard

    The results showed that, excluding invalid observations (i.e., 
observations with missing receipts-to-employee ratios or invalid NAICS 
codes with no size standards), 99.6% of SBA loan recipients during 
fiscal years 2021-2022 were deemed to be at or below their industry 
size standards. These results, however, do not enable the estimation of 
how often lenders applied industry-based size standards in approving 
loan applications.
    Table 5, Applicant's Eligibility Under the Statutory Alternative 
and Industry-Based Size Standards (FY 2021-2022), summarizes the 
applicant's eligibility results for the statutory alternative size 
standard and industry based size standard. The data in Table 5 shows 
that 99.5% of loan recipients (i.e., 117,288/117,882 = 0.995) were 
found to have met both the industry-based and statutory alternative 
size standard. Similarly, about 0.4% of loan recipients (i.e., 500/
117,882 = 0.004) that exceeded the industry-based size seemed to have 
qualified under the statutory alternative size standard. There were 
about 0.1% of loans (i.e., 81/117,882 = 0.001) that seemed to have 
exceeded the statutory alternative size standard but appeared to have 
qualified under the industry-based size standard. Overall, 99.9% (i.e., 
117,788/117,882 = 0.999) of total loan recipients were deemed small 
under the statutory alternative size standard and 99.6% (i.e., 117,369/
117,882 = 0.996) of loan recipients were deemed small under the 
industry-based size standard. Only 0.1% of loan recipients were found 
to have exceeded the statutory alternative size standard and 0.4% of 
recipients exceeded the industry-based size standard.

[[Page 48745]]



       Table 5--Applicant's Eligibility Under the Statutory Alternative and Industry-Based Size Standards
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                                               Alternative size standard
                                                        --------------------------------------       Total
                                                               Meets          Does not meet
----------------------------------------------------------------------------------------------------------------
Industry size standard...........  Meets...............            117,288                 81            117,369
                                   Does not meet.......                500                 13                513
                                                        --------------------------------------------------------
    Total........................                                  117,788                 94          * 117,882
----------------------------------------------------------------------------------------------------------------
*Note: This excludes invalid or incomplete observations in the form of invalid NAICS codes or missing RMA or
  receipts-to-employee ratios to estimate tangible net worth, net income, or receipts equivalent size standards.

    Based on the results obtained from this analysis, SBA estimates 
that about 500 or 0.4% of loan approvals issued during fiscal years 
2021-2022 went to firms that exceeded their industry based size 
standard, thereby implying that these firms were most likely qualified 
under the statutory alternative size standard. Based on the business 
loan data for fiscal years 2021-2022, SBA estimates the total value of 
such loans to be $1 billion, or 1.3% of $79.64 billion in total loans 
approved during that period. Such a small percentage (0.4%) of loan 
approvals issued to firms that exceeded their industry-based size 
standards suggests that a vast majority of small businesses receiving 
loans through SBA's Business Loan Programs would have qualified under 
their industry-based size standards and would not be impacted 
significantly by a modification, if any, to the statutory alternative 
size standard.
    The evaluation of the business loan data for fiscal years 2021-2022 
showed that the vast majority of SBA business loans have gone to 
businesses much smaller than the statutory alternative or industry-
based size standard. For example, as shown in Table 6, Distribution of 
Number of Loans and Loan Amount by Employment Size (FY 2021-2022), 71% 
of total business loans and 51.5% of loan amount went to businesses 
that had just 10 or fewer employees (including those with no 
employees). Similarly, loan recipients with 50 or fewer employees 
(including those with no employees) accounted for nearly 97% of loans 
and 92% of the loan amount. The average loan amount increased from less 
than $200,000 for loan recipients with no employees to about $2.9 
million for those with more than 200 employees.

                                       Table 6--Distribution of Number of Loans and Loan Amount by Employment Size
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Number of loans                              Approved loan amount
                                         ------------------------------------------------------------------------------------------------  Average loan
  Applicant size (Number of employees)                                                       Amount ($                                      amount ($)
                                               Count             %            Cum. %         million)            %            Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................          11,398             9.6             9.6        $2,230.3             2.8             2.8        $195,673
1 to 10.................................          72,723            61.4            71.0        38,757.1            48.7            51.5         532,941
11 to 25................................          22,371            18.9            89.9        21,956.8            27.6            79.0         981,483
26 to 50................................           8,302             7.0            96.9        10,554.4            13.3            92.3       1,271,302
51 to 75................................           1,902             1.6            98.5         2,948.8             3.7            96.0       1,550,356
76 to 100...............................             890             0.8            99.3         1,446.3             1.8            97.8       1,625,044
101 to 150..............................             507             0.4            99.7         1,003.2             1.3            99.1       1,978,692
151 to 200..............................             204             0.2            99.9           374.4             0.5            99.5       1,835,244
201 to 250..............................              69             0.1           100.0           200.2             0.3            99.8       2,901,916
>250....................................              58             0.0           100.0           167.0             0.2           100.0       2,878,597
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................         118,424           100.0  ..............        79,638.3           100.0  ..............         672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Distributions of number of loans and loan amount by tangible net 
worth and net income also showed similar patterns in that smaller loan 
recipients that were way below the size standard accounted for the vast 
majority of total loans and total loan amount. For example, as shown in 
Table 7, Distribution of Loans and Loan Amount by Tangible Net Worth 
(FY 2021-2022), below, loan recipients with less than $250,000 in 
tangible net worth accounted for 81% of total loans and about 63% of 
loan amount. Similarly, loan recipients with less than $1 million in 
tangible net worth accounted for 95% of total loans and about 89% of 
total loan amount. Finally, about 99.5% of total loans and loan amount 
went to businesses with less than $15 million in tangible net worth. 
The average loan amount generally increased with the level of tangible 
net worth.

[[Page 48746]]



                                          Table 7--Distribution of Loans and Loan Amount by Tangible Net Worth
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Number of loans                              Approved loan amount
 Applicant size ($ millions of tangible  ------------------------------------------------------------------------------------------------  Average loan
               net worth)                                                                    Amount ($                                      amount ($)
                                               Count             %            Cum. %         million)            %            Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................          11,330             9.6             9.6        $2,219.7             2.8             2.8        $195,910
0 to 0.1................................          64,628            54.6            64.1        31,615.8            39.7            42.5         489,196
0.1 to 0.25.............................          19,971            16.9            81.0        16,289.3            20.5            62.9         815,650
0.25 to 0.5.............................          10,448             8.8            89.8        11,922.1            15.0            77.9       1,141,085
0.5 to 0.75.............................           4,051             3.4            93.2         5,478.6             6.9            84.8       1,352,396
0.75 to 1.0.............................           2,229             1.9            95.1         3,163.8             4.0            88.8       1,419,390
1.0 to 2.5..............................           3,723             3.1            98.3         5,920.6             7.4            96.2       1,590,286
2.5 to 5.0..............................             978             0.8            99.1         1,785.4             2.2            98.4       1,825,532
5.0 to 7.5..............................             238             0.2            99.3           456.9             0.6            99.0       1,919,827
7.5 to 10.0.............................              93             0.1            99.4           167.9             0.2            99.2       1,804,951
10.0 to 12.5............................              65             0.1            99.4           114.5             0.1            99.4       1,760,852
12.5 to 15.0............................              34             0.0            99.5            61.8             0.1            99.4       1,817,097
15.0 to 20.0............................              40             0.0            99.5            83.4             0.1            99.5       2,085,250
20.0 to 25.0............................              18             0.0            99.5            32.5             0.0            99.6       1,804,189
25.0 to 30.0............................               8             0.0            99.5            21.2             0.0            99.6       2,648,163
>30.0...................................              28             0.0            99.5            41.2             0.1            99.7       1,469,957
NA *....................................             542             0.5           100.0           263.8             0.3           100.0         486,792
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................         118,424           100.0  ..............        79,638.3           100.0  ..............         672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs and RMA ratios or invalid NAICS codes.

    As shown in Table 8, Distribution of Loans and Loan Amount by Net 
Income (FY 2021-2022), below, nearly 80% of total loans and 78% of loan 
amount went to recipients with less than $100,000 in net income. 
Similarly, 99.2% of total loans and 98.7% of loan amount went to 
recipients with less than $1 million in net income. Recipients at or 
below $5 million in net income accounted for 99.5% of total loans and 
99.7% of total loan amount.

                                              Table 8--Distribution of Loans and Loan Amount by Net Income
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Number of loans                              Approved loan amount
    Applicant size ($ millions of net    ------------------------------------------------------------------------------------------------  Average loan
                 income)                                                                     Amount ($                                      amount ($)
                                               Count             %            Cum. %         million)            %            Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................          11,330             9.6             9.6        $2,219.7             2.8             2.8        $195,910
0 to 0.1................................          94,360            79.7            89.2        59,995.2            75.3            78.1         635,812
0.1 to 0.25.............................           8,423             7.1            96.4        10,627.2            13.3            91.5       1,261,693
0.25 to 0.5.............................           2,481             2.1            98.5         3,920.3             4.9            96.4       1,580,116
0.5 to 0.75.............................             677             0.6            99.0         1,312.9             1.6            98.0       1,939,273
0.75 to 1.0.............................             256             0.2            99.2           497.0             0.6            98.7       1,941,401
1.0 to 2.5..............................             308             0.3            99.5           694.8             0.9            99.5       2,255,715
2.5 to 5.0..............................              38             0.0            99.5            92.6             0.1            99.7       2,436,392
5.0 to 7.5..............................               5             0.0            99.5             4.1             0.0            99.7         813,560
7.5 to 10.0.............................               2             0.0            99.5             5.6             0.0            99.7       2,805,850
10.0 to 12.5............................               1             0.0            99.5             1.0             0.0            99.7       1,000,000
12.5 to 15.0............................  ..............             0.0            99.5             0.0             0.0            99.7  ..............
15.0 to 20.0............................               1             0.0            99.5             4.2             0.0            99.7       4,160,000
NA *....................................             542             0.5           100.0           263.8             0.3           100.0         486,792
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................         118,424           100.0  ..............        79,638.3           100.0  ..............         672,485
--------------------------------------------------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs and RMA ratios or invalid NAICS codes.

    The business loan data for fiscal years 2021-2022 shows that the 
vast majority of loan actions occurred in industries with receipts-
based size standards. For example, as shown in Table 9, Distributions 
of Loans and Loan Amount by Size Standards Type (FY 2021-2022), 
industries with receipts-based size standards accounted for nearly 87% 
of total loans and about 83% of loan amount. Industries with employee-
based size standards accounted for about 13% of loans and about 17% of 
loan amount.

[[Page 48747]]



                     Table 9--Distributions of Loans and Loan Amount by Size Standards Type
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                                          Number of loans              Approved loan amount
                                                 ---------------------------------------------------------------
               Size standard type                                                    Amount ($
                                                       Count             %           billion)            %
----------------------------------------------------------------------------------------------------------------
Employee-based..................................          15,682            13.2            13.8            17.3
Receipts-based..................................         102,612            86.6            65.8            82.6
NA *............................................             130             0.1             0.0             0.0
                                                 ---------------------------------------------------------------
    Total.......................................         118,424           100.0            79.6           100.0
----------------------------------------------------------------------------------------------------------------
* NA represents observations for which tangible net worth couldn't be estimated due to missing receipts-to-jobs
  and RMA ratios or invalid NAICS codes with missing size standards.

    The distributions of number of loans and loan amount by NAICS 
sector are presented in Table 10, Distributions of Loans and Loan 
Amount by NAICS Sector (FY 2021-2022). Consistent with Table 9, above, 
sectors with receipts-based size standards account for the largest 
proportions of loans and loan amount. For example, based on the data 
for fiscal years 2021-2022, sectors with receipts-based size standards, 
including Sector 72 (Accommodation and Food Services), Sector 44-45 
(Retail Trade), Sector 62 (Health Care and Social Assistance), Sector 
23 (Construction), and Sector 81 (Other Services) account for 56% of 
loans and 58% of loan amount during fiscal years 2021-2022. Among the 
sectors with employee-based size standards, Sector 31-33 
(Manufacturing) accounted for 7.6% of loans and 9.8% of loan amount.

                        Table 10--Distributions of Loans and Loan Amount by NAICS Sector
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                                          Number of loans              Approved loan amount
                                                 ---------------------------------------------------------------
          Sector code             Sector title                                        Amount
                                                       Count             %          ($million)           %
----------------------------------------------------------------------------------------------------------------
11............................  Agriculture,               1,465             1.2           1,050             1.3
                                 Forestry,
                                 Fishing and
                                 Hunting.
21............................  Mining,                      245             0.2             236             0.3
                                 Quarrying, and
                                 Oil and Gas
                                 Extraction.
22............................  Utilities.......             190             0.2              98             0.1
23............................  Construction....           2,713            10.7           5,933             7.4
31-33.........................  Manufacturing...           8,968             7.6           7,788             9.8
42............................  Wholesale Trade.           5,488             4.6           5,005             6.3
44-45.........................  Retail Trade....           5,851            13.4          11,730            14.7
48-49.........................  Transportation             7,254             6.1           2,888             3.6
                                 and Warehousing.
51............................  Information.....             989             0.8             643             0.8
52............................  Finance and                2,531             2.1           1,460             1.8
                                 Insurance.
53............................  Real Estate and            3,840             3.2           3,031             3.8
                                 Rental and
                                 Leasing.
54............................  Professional,             10,181             8.6           5,505             6.9
                                 Scientific, and
                                 Technical
                                 Services.
55............................  Management of                 99             0.1             103             0.1
                                 Companies and
                                 Enterprises.
56............................  Administrative             5,811             4.9           2,391             3.0
                                 and Support and
                                 Waste
                                 Management and
                                 Remediation
                                 Services.
61............................  Education                  1,616             1.4             927             1.2
                                 Services.
62............................  Health Care and           12,205            10.3           8,970            11.3
                                 Social
                                 Assistance.
71............................  Arts,                      3,384             2.9           2,079             2.6
                                 Entertainment,
                                 and Recreation.
72............................  Accommodation             15,039            12.7          13,664            17.2
                                 and Food
                                 Services.
81............................  Other services..          10,555             8.9           6,138             7.7
                                                 ---------------------------------------------------------------
    Grand Total...............                           118,424           100.0          79,638           100.0
----------------------------------------------------------------------------------------------------------------

IV. Comparing Industry-Based Size Standards With Statutory Alternative 
Size Standard

    For this, SBA converted all industry-based size standards to 
tangible net worth and net income equivalents using the following 
steps:
    Step 1: Convert all industry-based size standards to the receipts-
equivalent size standard. If an industry has a receipt-based size 
standard, the receipts-equivalent size standard is the receipts-based 
size standard itself. If an industry has an employee-based size 
standard, the receipts-equivalent size standard is obtained by 
multiplying the employee-based size standard (number of employees) by 
the ratio of small business receipts to small business number of 
employees for that industry.
    Step 2: Estimate net fixed assets (NFA) using the receipts 
equivalent size standard for the j-th industry.

[[Page 48748]]

[GRAPHIC] [TIFF OMITTED] TP28JY23.085

[GRAPHIC] [TIFF OMITTED] TP28JY23.086

    Step 3: Estimate tangible net worth (TNW) equivalent of receipts 
equivalent size standard for the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.087

where TNWj is an estimate of tangible net worth corresponding to the 
receipts equivalent size standard in the j-the industry and (NFA/TNW)j 
is the net fixed assets to tangible net worth ratio in the j-th 
industry from RMA.

    Step 4: Estimate net income (NI) equivalent of the receipts 
equivalent size standard for the j-th industry.
[GRAPHIC] [TIFF OMITTED] TP28JY23.088

[GRAPHIC] [TIFF OMITTED] TP28JY23.089

    Step 5: Determine whether the industry size standard is lower or 
higher than the statutory alternative size standard in relative terms 
using tangible net worth equivalent obtained in Step 3 and net income 
equivalent from Step 4.

whether the industry size standard f or the j-th industry is lower or 
highter than the alternative size standard:
{Lower if TNWj <=$15 million and NIj <=$5 million Higher if TNWj >$15 
mission or NIj >$5 million or both

    Excluding observations with missing or incomplete information 
(i.e., observations with missing receipts-to-job ratios or missing one 
or more of the RMA ratios), above analysis yielded tangible net worth 
and net income equivalents of the industry-based size standards for 955 
industries under NAICS 2022, a distribution of which is shown in Table 
11, Comparison Between Industry-Based and Statutory Alternative Size 
Standards (FY 2021-2022). The results show that whether the industry-
based size standard is lower or higher than the statutory alternative 
size standard in relative terms is contingent on whether the industry 
has a receipts- or employee-based size standard. For example, in 
relative terms, for 82.5% of industries with employee-based size 
standards, the industry based size standard is found to be higher than 
the tangible net worth ($15 million) and net income ($5 million) based 
interim statutory alternative size standard. It is quite opposite among 
the industries with the receipts-based size standards. For nearly 93% 
of industries that have a receipts-based size standard, the industry 
size standard is relatively smaller than the statutory alternative size 
standard.

[[Page 48749]]

These results suggest that the statutory alternative size standard 
provides more benefits to applicants in the receipts-based industries 
as compared to employee-based industries. Table 12, Comparison Between 
Industry-Based and Statutory Alternative Size Standards by NAICS Sector 
(FY 2021-2022), summarizes these results by sector. For the vast 
majority of industries in such sectors as Mining, Utilities, and 
Manufacturing which mostly have employee-based size standards, the 
industry-based size standards are relatively higher than the statutory 
alternative size standard. Opposite is the case for industries in 
sectors with receipts-based size standards, such as Agriculture, Retail 
Trade, Professional and Administrative Support Services, Education 
Services, Health Care, Accommodation and Food Services, and Other 
Services where the statutory alternative size standard is relatively 
higher than the industry-based size standards.

              Table 11--Comparison Between Industry-Based and Statutory Alternative Size Standards
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                                           Whether industry size standard is
                                                            lower or higher than statutory
                   Size standard type                          alternative size standard             Total
                                                        --------------------------------------
                                                               Higher             Lower
----------------------------------------------------------------------------------------------------------------
Employee-based.........................................        392 (82.5%)         83 (17.5%)         475 (100%)
Receipts-based.........................................          35 (7.3%)        445 (92.7%)         480 (100%)
                                                        --------------------------------------------------------
    Total..............................................        427 (44.7%)        528 (55.3%)         955 (100%)
----------------------------------------------------------------------------------------------------------------
Note: Figures in parentheses are percentages based on row totals.


      Table 12--Comparison Between Industry-Based and Statutory Alternative Size Standards by NAICS Sector
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                                           Whether industry size standard is
                                                            lower or higher than statutory
           Sector code                 Sector title            alternative size standard             Total
                                                        --------------------------------------
                                                               Higher             Lower
----------------------------------------------------------------------------------------------------------------
11...............................  Agriculture,                   0 (0.0%)        63 (100.0%)        63 (100.0%)
                                    Forestry, Fishing
                                    and Hunting.
21...............................  Mining, Quarrying,           17 (81.0%)          4 (19.0%)        21 (100.0%)
                                    and Oil and Gas
                                    Extraction.
22...............................  Utilities...........         12 (85.7%)          2 (14.3%)        14 (100.0%)
23...............................  Construction........           0 (0.0%)        30 (100.0%)        30 (100.0%)
31-33............................  Manufacturing.......        319 (92.2%)          27 (7.8%)       346 (100.0%)
42...............................  Wholesale Trade.....         22 (31.9%)         47 (68.1%)        69 (100.0%)
44-45............................  Retail Trade........           0 (0.0%)        57 (100.0%)        57 (100.0%)
48-49............................  Transportation and           15 (27.8%)         39 (72.2%)        54 (100.0%)
                                    Warehousing.
51...............................  Information.........          8 (28.6%)         20 (71.4%)        28 (100.0%)
52...............................  Finance and                    0 (0.0%)          16 (100%)        16 (100.0%)
                                    Insurance.
53...............................  Real Estate and              10 (41.7%)         14 (58.3%)        24 (100.0%)
                                    Rental and Leasing.
54...............................  Professional,                  3 (6.3%)         45 (93.8%)        48 (100.0%)
                                    Scientific, and
                                    Technical Services.
55...............................  Management of                  0 (0.0%)         2 (100.0%)         2 (100.0%)
                                    Companies and
                                    Enterprises.
56...............................  Administrative and             0 (0.0%)        44 (100.0%)        44 (100.0%)
                                    Support and Waste
                                    Management and
                                    Remediation
                                    Services.
61...............................  Education Services..          3 (17.6%)         14 (82.4%)        17 (100.0%)
62...............................  Health Care and                3 (7.7%)         36 (92.3%)        39 (100.0%)
                                    Social Assistance.
71...............................  Arts, Entertainment,          9 (36.0%)         16 (64.0%)        25 (100.0%)
                                    and Recreation.
72...............................  Accommodation and              1 (6.7%)         14 (93.3%)        15 (100.0%)
                                    Food Services.
81...............................  Other services......          5 (11.6%)         38 (88.4%)        43 (100.0%)
                                                        --------------------------------------------------------
    Total........................                              427 (44.7%)        528 (55.3%)       955 (100.0%)
----------------------------------------------------------------------------------------------------------------

V. Advanced Notice of Proposed Rulemaking (ANPRM)

    In 2018, SBA published in the Federal Register an advanced notice 
of proposed rulemaking (ANPRM) seeking public input to assist in 
establishing a permanent alternative size standard for its 7(a) and 
CDC/504 Loan Programs (83 FR 12506; March 22, 2018). SBA also invited 
suggestions on sources of relevant data and information that SBA should 
evaluate in developing a permanent alternative size standard and in 
assessing its impact. Specifically, ANPRM sought the comments on the 
following issues:
    1. SBA sought comment on whether the level of the temporary 
statutory alternative size standard (i.e., $15 million in tangible net 
worth and $5 million in average net income) is appropriate as a new 
permanent alternative size standard under the credit environment at 
that time. SBA asked commenters to provide data and supporting analysis 
for supporting or not supporting the statutory alternative size 
standard as a permanent alternative size standard.
    2. SBA sought comment on the impact of using an alternative size 
standard on small businesses seeking loans through its Business Loan 
Programs, specifically information on industries/sectors where small 
businesses benefit the most or do not benefit at all from the use of an 
alternative size standard. SBA also asked for data on the number of

[[Page 48750]]

businesses approved for SBA's Business Loans under the interim 
statutory alternative size standard that otherwise could not have been 
approved under their industry based size standards.
    3. SBA invited suggestions on sources of relevant data and 
information, especially tangible net worth and average net income of 
applicants to SBA's Business Loan Programs, that SBA can evaluate to 
assess the impact of the statutory alternative size standard on small 
businesses and use in developing a new permanent alternative size 
standard and in estimating its impact.
    4. SBA also sought comments on how the statutory alternative size 
standard has affected the processes used by lenders participating in 
the Business Loan Programs and what impacts a permanent alternative 
size standard would have on application processes and processing times.

Discussion of Comments

    SBA received a total of 34 comments on the ANPRM, of which 11 were 
found to be not pertinent to the scope of the ANPRM. Of the 23 comments 
that were pertinent, all 23 not only supported the statutory 
alternative size standard, but also recommended making it the permanent 
alternative size standard for the SBA's 7(a) and CDC/504 Loan Programs.
    Commenters included two associations of lenders offering loans to 
applicants to the Business Loan Programs--one representing lenders that 
primarily served applicants to the 7(a) business loan program and other 
representing mostly CDCs that offered loans under the 504/CDC loan 
program--and their members supporting their respective position on the 
ANPRM. Specifically, there were 11 comments (six of which were from 
different individuals of one 7(a) lender) that supported the position 
of the association of 7(a) lenders and 8 comments that either supported 
the position of the association of the CDCs or provided the similar 
comments as that association. The remainder of commenters consisted of 
individual lending entities that provided SBA's guaranteed loans. 
Interestingly, commenters included no small businesses that applied to 
or received loans from SBA's Business Loan Programs. Below SBA 
discusses these comments by topic.

Comments on Appropriateness of the Statutory Alternative Size Standard 
as A Permanent Alternative Size Standard

    An association commenter expressed support for establishing a 
permanent alternative size standard to applicants for the SBA's Loan 
Programs. In order to provide meaningful comments to the ANPRM, the 
association conducted an informal survey seeking comments from its 572 
members, of which 67 responded. While an overwhelming majority of the 
respondents (88%) supported making the statutory alternative size 
standard permanent, three recommended decreasing the standard and one 
recommended increasing it to $20 million in tangible net worth and $7.5 
million in average net income. Based on the input from its members, the 
association recommended that the statutory alternative size standard 
should be made permanent because it has not only simplified the loan 
application process, but it also has enabled a small number of 
businesses above the industry specific size standards to qualify for 
SBA's 7(a) financing. Additionally, the association maintained that it 
is not aware of any negative impacts of using the statutory alternative 
size standard, such as exclusion of businesses from loan eligibility. 
However, citing the lack of information the association did not provide 
any data and analysis to support its position.
    Another association stated that making the statutory alternative 
size standard permanent is vital for allowing small businesses to 
access credit through the SBA's 504 loan program. The association 
maintained that the statutory alternative size standard has enabled 
small businesses that were not otherwise eligible under their industry-
based size standards to receive CDC/504 loans. It added that using 
industry-based size standards in conjunction with the statutory 
alternative size standard has been beneficial to capturing small 
businesses that require credit through the CDC/504 Loan Program. As to 
whether the level of the statutory alternative size standard is still 
appropriate, the association stated that the current level is 
sufficient and should remain as is until such time as economic 
conditions, inflation, and other factors warrant an increase. It 
expressed concerns with potential unintended consequences of deviating 
from the statutory alternative size standard. A few other individual 
lenders also supported making the statutory alternative size standard 
permanent for SBA's Business Loan Programs.

SBA Response

    Section 1116 of the Jobs Act requires SBA to establish a permanent 
alternative size standard using maximum tangible net worth and average 
net income for applicants of the SBA's Business Loan Programs. The Jobs 
Act also established for applicants for the SBA's Business Loan 
Programs a statutory alternative size standard of not more than $15 
million in tangible net worth and of not more than $5 million in the 
average net income after Federal income taxes (excluding any carry-over 
losses) of the applicant for the two full fiscal years before the date 
of the application. SBA agrees with the commenters that the statutory 
alternative size standard has not only simplified the loan application 
process but also has enabled some applicants above the industry-based 
size standard to qualify for SBA's Business Loan Programs. Based on the 
analysis of its internal business loan data for fiscal years 2021-2022, 
SBA found that 500 loans totaling more than $1 billion were approved 
under the statutory alternative size standard which otherwise would not 
have qualified under the industry-based size standard. SBA agrees with 
the comment that the interim statutory alternative size standard has 
not caused any negative impacts such as excluding applicants from loan 
eligibility. Rather, using the statutory alternative size standard in 
conjunction industry-based size standards has expanded eligibility for 
SBA Business Loan Programs, especially for applicants from industries 
with receipts-based size standards. In absence of its negative impacts 
on businesses seeking SBA loans, SBA agrees with the commenters that 
the statutory alternative size standard can serve as a permanent 
alternative size standard.

Comments Relating to the Impact of Using the Statutory Alternative Size 
Standard on Small Businesses

    An association maintained that the statutory alternative size 
standard has both simplified the loan application process and allowed a 
small number of businesses that might not have qualified under the 
industry based size standards to receive 7(a) financing. Based on input 
from its members, the association identified various industries/sectors 
that benefit from the use of the statutory alternative size standard 
for the SBA's 7(a) loan program. These include manufacturers; 
distributors; software, technology and professional services; 
construction; warehousing; retail trade (e.g., car dealers); 
hospitality industry; and agriculture businesses. Other commenters 
maintained that healthcare firms and professional organizations have 
also benefited from the SBA's Business Loan Programs. However, the 
association indicated that it does not have the data related to the 
number of

[[Page 48751]]

businesses that might have qualified for loans under the statutory 
alternative size standard, which would not have qualified under the 
industry- based size standards.
    Another association indicated that certified development companies 
(CDCs) have historically used the alternative size standard to 
establish eligibility for the CDC/504 program and that only 
circumstance where the industry-based size standard would be used is 
when the applicant is too large to qualify under the alternative size 
standard but would meet the industry based size standard. The 
association was also unable to offer data on the number of applicants 
approved under CDC/504 loans under the statutory alternative size 
standard that could not otherwise be approved under the industry-based 
size standard because, it stated, most CDCs use the alternative size 
standard for eligibility purposes and therefore do not capture data 
relevant to eligibility under the industry-based size standard.

SBA Response

    SBA agrees with the commenters that the statutory alternative size 
standard has not only simplified the loan application process, but it 
also has enabled some applicants to SBA's Business Loan Programs which 
might otherwise not have qualified under the industry-based size 
standards to receive SBA loans. This is consistent with SBA's analysis 
which showed 500 or 0.4% of loans which would likely not have qualified 
under the industry-based size standards to qualify under the statutory 
alternative size standard. SBA agrees with a commenter's list of 
industries or sectors that have benefited most from the statutory 
alternative size standard. SBA's analysis of the data for fiscal years 
2021-2022 also showed hospitality, health care, construction, 
manufacturing, retail trade, and professional services industries 
benefiting most from the statutory alternative size standard.

Comments Pertaining to Data Sources

    Based on the input from its members responding to the survey, the 
above-referenced association suggested a few data sources, including 
the Risk Management Association (RMA), Moody's, Dun and Bradstreet, 
PayNet, IBISWorld, Federal tax returns, Survey of Business Owners, 
SBA's own loan application and oversight data, and the U.S. Business 
Census. Another commenter also suggested RMA, IBISWorld, and Dun and 
Bradstreet. A separate association commenter suggested that SBA should 
use its own data on applicants to the CDC/504 loan program.

SBA Response

    In response to the comment, SBA has evaluated the various RMA 
financial ratios for estimation of tangible net worth and net income 
for applicants to the SBA's Business Loan Programs. By combining 
industry ratios from RMA with receipts-to-job ratios from Economic 
Census tabulations, as discussed previously, SBA was able to estimate 
tangible net worth and net income for each recipient of SBA's business 
loans. By combining these results with industry-based size standards, 
SBA was able to estimate the number of loans that were approved under 
the statutory alternative size standard which otherwise would not have 
qualified under the industry-based size standards.

Comments Relating to Impacts of a Permanent Alternative Size Standard 
on Application Process and Processing Times

    Based on the survey responses and anecdotally, an association 
maintained that the statutory alternative size standard has simplified 
and streamlined the 7(a) loan application process because it is the 
same for all businesses and lenders do not have to look up NAICS codes. 
Citing one lender, the association added that using industry-based size 
standards takes more time and can be more difficult if the company's 
operation involves multiple NAICS codes. As to the effects a permanent 
size standard would have on application processes and processing times, 
the association noted that because lenders participating in the 7(a) 
program have treated the current ``temporary'' alternative size 
standard as if it were permanent, it would not expect a ``permanent'' 
alternative size standard to significantly alter either application 
processes or loan processing times.
    Another commenter maintained that because most CDCs have 
historically used the alternative size standard for small business 
eligibility purposes, a permanent alternative size standard would be 
``business as usual'' for the CDC industry with no effect on 
application processes and processing times.
    One commenter indicated that the alternative size standard has 
aided in streamlining the lending process and served as catalyst to 
increase lending to small businesses, thereby contributing to the 
recovery from the 2007-2009 Great Recession.

SBA Response

    SBA agrees with the comment that, by avoiding the use of NAICS 
codes in determining applicants' size eligibility, using the 
alternative size standard has benefitted lenders in terms of 
simplifying and streamlining the loan application process. It has also 
helped relieve applicants of the burden of keeping three years or 
potentially five years of data to establish eligibility using industry-
based size standards.

VI. Appropriateness of Interim Statutory Alternative Size Standard as 
the Permanent Alternative Size Standard

    Section 1116 of the Jobs Act directed SBA to establish an 
alternative size standard based on tangible net worth and net income 
for determining size eligibility for applicants to the Agency's 7(a) 
and CDC/504 Loan Programs. As stated previously, the Jobs Act also 
established the interim statutory alternative size standard of $15 
million tangible net worth and $5 million of net income to remain in 
effect until SBA establishes a permanent alternative size standard 
based on tangible net worth and net income.
    In the absence of evidence of supporting a different alternative 
size standard for 7(a) and CDC/504 Loan Programs and in the absence of 
any negative impacts of using the statutory alternative size standard, 
SBA is proposing to adopt the statutory alternative size standard of 
$15 million in tangible net worth and $5 million in net income as the 
permanent alternative size standard, subject to adjustment for 
inflation that has occurred since the establishment of the statutory 
alternative size standard in 2010. Most commenters to the March 2018 
ANPRM also recommended adopting the interim statutory alternative size 
standard as a permanent alternative size standard for SBA's Business 
Loan Programs. This proposed rule seeks comment and public input on 
adopting the interim statutory size standard as the permanent 
alternative size standard. The commenters to the ANPRM maintained that 
the statutory alternative size standard has enabled applicants that 
would not have otherwise qualified under the industry-based size 
standards to receive SBA's financing. The commenters stated that the 
statutory alternative size standard has also benefited the SBA lenders 
in terms of simplifying and streamlining the loan application process.
    The analytical results presented in the previous sections support 
using the statutory alternative size standard as a

[[Page 48752]]

permanent alternative size standard. Based on the data for fiscal years 
2021-2022, nearly all (99.9%) of recipients of loans from SBA's 
Business Loan Programs were found to be at or below the interim 
statutory alternative size standard (see Table 5). In comparison, about 
95-96% of firms are considered small under the current industry-based 
size standards. The interim statutory alternative size standard seemed 
to have enabled 500 applicants that would not have otherwise qualified 
under the industry-based size standard to receive SBA's loans. The vast 
majority of business loans and loan amounts went to businesses that 
were well below the statutory alternative size standard. For example, 
during fiscal years 2021-2022, loan recipients with tangible net worth 
of just $1 million or less accounted for 95% of loans and nearly 89% of 
loan amount (see Table 7). Similarly, 98.5% of loans and 96.4% of loan 
amount went to businesses with net income of $0.5 million or less (see 
Table 8). These results indicate that the interim statutory alternative 
size standard, subject to adjustment for inflation, is serving well its 
intended purposes in terms of rendering applicants that do not qualify 
under the industry-based size standard eligible for SBA's Business Loan 
Programs.
    For nearly 93% of industries with receipts-based size standards, in 
relative terms, the interim statutory alternative size standard was 
higher than the current industry-based size standard. Industries with 
receipts-based size standards accounted for the vast majority of loan 
actions, accounting for 87% of total loans and 83% of loan amount 
during fiscal years 2021-2022 (see Table 9). Only for 17.5% of the 
industries with employee-based size standards, the industry-based size 
standard was, in relative terms, smaller than the statutory alternative 
size standard. However, industries with employee-based size standards 
accounted for 13% loans and 17% of loan amount. Applicants in those 
industries will continue to qualify under the industry-based size 
standards, many of which have been increased as part of the second 
five-year review of size standards under Section 1344 of the Jobs Act.
    SBA also considered returning the alternative size standard to that 
adopted by SBA prior to the passage of the Jobs Act (i.e., $8.5 million 
in tangible net worth and $3 million in net income), but, because the 
statutory alternative size standard significantly exceeded the prior 
alternative size standard, using the prior alternative size standard 
would be counter to Congressional direction. Additionally, the old 
alternative size standard would have rendered 144 applicants ineligible 
for SBA's Business Loan Programs which would otherwise have qualified 
under the interim statutory alternative size standard.
    SBA also considered increasing the statutory alternative size 
standard beyond inflation-adjusted levels of $15 million of tangible 
net worth and $5 million of net income. However, the analytical results 
presented and discussed in the previous sections did not indicate that 
an increase is warranted. Almost all loan recipients under the SBA's 
Business Loan Programs seemed to be at or below the statutory 
alternative size standard and the vast majority of loans went to 
businesses that were significantly below the statutory alternative size 
standard.
    Accordingly, SBA proposes to adopt the statutory alternative size 
standard as the permanent alternative size standard, subject to 
inflation adjustment as discussed in the next section.

VII. Inflation Adjustment of Statutory Alternative Size Standard

    For the inflation adjustment of the statutory alternative size 
standard for SBA's Business Loan Programs, SBA has used the inflation 
adjustment methodology it describes in its ``Size Standards 
Methodology'' white paper, available at www.sba.gov/size. SBA applied 
the same methodology in its previous inflation adjustments, including 
the latest inflation adjustment in 2022 (87 FR 69118; November 17, 
2022). This methodology can be described in terms of the following 
steps:

    1. Selecting an inflation measure.
    2. Selecting the base and end periods.
    3. Calculating the inflation rate.
    4. Making adjustments to the size standard.

1. Selecting an Inflation Measure

    SBA establishes small business size standards to determine the 
eligibility of businesses for a wide variety of SBA's and other Federal 
programs. Many businesses participating in those programs are engaged 
in multiple industries and are producing a wide range of goods and 
services. Therefore, it is important that the Agency use a broad 
measure of inflation to adjust its size standards. SBA's preferred 
measure of inflation has consistently been the chain-type price index 
for the U.S. Gross Domestic Product (GDP price index), published by the 
U.S. Department of Commerce, Bureau of Economic Analysis (BEA) on a 
quarterly basis as part of its National Income and Product Accounts 
(NIPA), available at www.bea.gov.\7\
---------------------------------------------------------------------------

    \7\ As part of the 2014 inflation adjustment (79 FR 33647 (June 
12, 2014)), SBA reviewed various measures of inflation published by 
the Federal Government, including the GDP price index, consumer 
price index (CPI), producer price index (PPI), personal consumption 
expenditures (PCE) price index, and unit labor cost. Based on that 
review, SBA determined that the GDP price index is the most 
appropriate measure of inflation for purposes of adjusting size 
standards for inflation. Historically, SBA has used the GDP price 
index for adjusting size standards for inflation.
---------------------------------------------------------------------------

2. Selecting the Base and End Periods

    For this inflation adjustment of the statutory alternative size 
standard, SBA selected the third quarter of 2010 as the base period 
because the size standard was enacted on September 27, 2010. SBA 
selected the fourth quarter of 2022 as the end period because it was 
the latest quarter for which GDP price index data were available when 
this rule was developed.

3. Calculating the Rate of Inflation

    The GDP price index for the base period (i.e., 3rd quarter of 2010) 
was 96.312 and, according to the BEA GDP third estimate released on 
March 30, 2023 (the latest available when this rule was prepared), the 
GDP price index for the end period (i.e., 4th quarter of 2022) was 
129.502. Accordingly, inflation increased 34.46% from the third quarter 
of 2010 to the fourth quarter of 2022 (((129.502 / 96.312) - 1) x 100% 
= 34.46%).

4. Making Adjustments to the Size Standard

    Tangible net worth ($15 million) and net income ($5 million) of the 
interim statutory alternative size standard were adjusted by 
multiplying their current levels by 1.3446 and rounding the results to 
the nearest $500,000. The results were $20.169 million for tangible net 
worth and $6.723 million for net income, which were rounded to $20 
million and $6.5 million, respectively. These results are presented in 
Table 13, Adjustment of Statutory Alternative Size Standard for SBA 
Business Loan Programs for Inflation.

[[Page 48753]]



                                            Table 13--Adjustment of Statutory Alternative Size Standard for SBA Business Loan Programs for Inflation
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                Threshold name and value                        Base period and GDP price index             End period and GDP price index
-------------------------------------------------------------------------------------------------------------------------------------------------                    Adjusted        Adjusted
                                                                                         GDP price                                   GDP price      Inflation %   threshold (not     threshold
                  Name                         Value              Base period              index              End period               index                         rounded)        (rounded)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Tangible net worth (Interim Rule).......     $15,000,000  Third quarter of 2010.....          96.312  Fourth quarter of 2022....         129.502           34.46     $20,169,138     $20,000,000
Net income (Interim Rule)...............       5,000,000  Third quarter of 2010.....          96.312  Fourth quarter of 2022....         129.502           34.46       6,723,046       6,500,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

VIII. Inflation Adjustment to Surety Bond Guarantee Limits

    Section 1695 of the National Defense Authorization Act for Fiscal 
Year 2013 (``NDAA 2013'') (Pub. L. 112-239; January 2, 2013) increased 
the SBG guarantee limit to $6.5 million, and up to $10 million for a 
Federal contract if a Federal contracting officer certifies that such a 
guarantee is necessary.\8\ The act also included a provision to 
periodically increase the $6.5 million limit for inflation in 
accordance with 41 U.S.C. 1908.
---------------------------------------------------------------------------

    \8\ Section 508 of the American Recovery and Reinvestment Act of 
2009 (ARRA) (Pub. L.111-5; Feb 17, 2009) temporarily increased, from 
February 17, 2009, through September 30, 2010, the maximum bond 
amount from $2 million to $5 million. The act also authorized the 
SBA to guarantee a bond of up to $10 million for Federal contracts 
if a Federal contracting officer certified that such a guarantee was 
necessary. Using its rulemaking authority, SBA made ARRA's temporary 
size standard permanent on August 11, 2010 (76 FR 48549).
---------------------------------------------------------------------------

    That provision, 41 U.S.C. 1908, provides that inflation adjustments 
for acquisition-related dollar thresholds are to be set by the Federal 
Acquisition Regulatory Council (FAR Council). It also requires that the 
Consumer Price Index (CPI) is used to measure inflation. The FAR 
Council is established under 41 U.S.C. 1302 to assist in the direction 
and coordination of procurement policy and regulatory activities for 
the Federal Government. The FAR Council is required to adjust 
acquisition-related dollar thresholds every five years.
    Based on CPI, inflation has increased more than 30% since 2013. 
This has eroded the value of the bonding limits in real terms since the 
limits were set by Congress in 2013. SBA has an important statutory 
requirement to adjust the bonding limits in accordance with CPI and the 
FAR Council. The current limits are $6.5 million and $10 million for 
Federal contracts if a Federal agency certifies that a greater amount 
is necessary. SBA has not adjusted its bonding limits since 2013.
    The FAR Council has not set a specific threshold in the Federal 
Acquisition Regulations (FAR) for SBA bonding limits. The FAR Council 
adjusts the acquisition-related dollar thresholds every five years with 
the last adjustments occurring in 2015 and 2020. The FAR Council had a 
$6.5 million acquisition-related threshold in effect in 2013 when the 
SBA bonding limits were set. In 2015, as part of inflationary 
adjustments to the acquisition-related dollar thresholds, the FAR 
Council increased the $6.5 million threshold to $7 million (80 FR 
38293; July 2, 2015). Likewise, in 2020, the FAR Council adjusted the 
$7 million threshold to $7.5 million (85 FR 62485; October 2, 2020). 
The FAR did not have a $10 million threshold in effect in 2013.
    In the absence of a specific FAR threshold for SBA bonding limits, 
SBA proposes this adjustment which is to follow the FAR adjustment from 
$6.5 million to $7.5 million in 2020 and then calculate an adjustment 
from 2020 to 2023 using the same CPI methodology.
    SBA is also adjusting the existing limit of $10 million to maintain 
the same percentage spread (the lower limit is 65% of the upper limit). 
By adjusting both at the same time, SBA maintains the effectiveness of 
the necessity provision and avoids the upper limit becoming 
meaningless, because if only the lower limit is adjusted then at some 
point it will exceed the necessity limit. This rulemaking fulfills the 
statutory objective of maintaining the value of monetary-based bonding 
limits in real (i.e., inflation-adjusted) terms.
    The results of the inflation adjustment were $8,764,625 and 
$13,846,154 million if a Federal agency certifies necessity, which were 
rounded to $9 million and $14 million, respectively. These results are 
presented in Table 14, Adjustment of Lower Surety Bond Contract Limit 
($6.5 Million) for Inflation Using CPI from 2020 to 2023 and Table 15, 
Adjustment of Surety Bond Upper Contract Limit ($10 Million) from 2013 
to 2023.

                                        Table 14--Adjustment of Surety Bond Lower Contract Limit ($6.5 Million) for Inflation Using CPI From 2020 to 2023
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                Threshold name and value                  Base period and consumer price index (CPI)   End period and consumer price index (CPI)                     Adjusted        Adjusted
-------------------------------------------------------------------------------------------------------------------------------------------------    Inflation    threshold (not     threshold
               Time period                     Value              Base period              CPI *              End period               CPI *                         rounded)        (rounded)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2013 to 2020............................      $6,500,000   In 2015, the FAR Council adjusted the $6.5 million threshold to $7 million, and in 2020 adjusted it to $7.5 million.       $7,500,000
                                                         ------------------------------------------------------------------------------------------------------------------------
2020 to 2023............................       7,500,000  March 2020................         258.124  February 2023.............         301.648          16.86%      $8,764,625       9,000,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Note: CPI data downloaded from the U.S. Bureau of Labor Statistics website on March 28, 2023.


[[Page 48754]]


            Table 15--Adjustment of Surety Bond Upper Contract Limit ($10 Million) From 2013 to 2023
----------------------------------------------------------------------------------------------------------------
                             Current                                  Adjusted threshold (not        Adjusted
-----------------------------------------------------------------            rounded)                threshold
                                                                 --------------------------------    (rounded)
                                       Value        Spread (%)                                   ---------------
                                                                       Value        Spread (%)         Value
----------------------------------------------------------------------------------------------------------------
Contract value: Lower limit.....      $6,500,000              65      $9,000,000              65      $9,000,000
Contract value: Upper limit.....      10,000,000             100      13,846,154             100      14,000,000
----------------------------------------------------------------------------------------------------------------

IX. Section-by-Section Analysis

A. Section 121.301(a)

    Section 1116 of the Jobs Act established a statutory alternative 
size standard using maximum tangible net worth of $15 million and 
maximum net income of $5 million, and it permanently extended the 
application of the alternative size standard to the applicants to 7(a) 
Business Loan Program. Prior to the Jobs Act, the alternative size 
standard applied to 7(a) Business Loan Program on a temporary basis. To 
recognize that the alternative size standard is no longer temporary, 
Sec.  121.301(a) is revised as follows: ``For Business Loans and for 
Disaster Loans (other than physical disaster loans), an applicant 
business concern must satisfy two criteria:''

B. Section 121.301(b)

    For the same reason as for Sec. Sec.  121.301(a) and 121.301(b) is 
revised as follows: ``For 7(a) Business Loans and Development Company 
programs, an applicant must meet one of the following standards:''

C. Section 121.301(e)

    The Department of Labor (DOL) no longer issues the ``Area Trends in 
Employment and Unemployment'' monthly publication, and DOL publishes 
the list of Labor Surplus Areas (LSAs) annually rather than monthly. To 
reflect this change, SBA is amending the second sentence in Sec.  
121.301(e) as follows: ``The U.S. Department of Labor (DOL) issues the 
Labor Surplus Area (LSA) list on a fiscal year basis on its website at 
www.dol.gov/agencies/eta/lsa.''

D. Section 115.10 ``Applicable Statutory Limit''

    Section 411(a)(1)(A) of the Small Business Investment Act of 1958 
established a statutory limit for the maximum amount of a contract for 
which SBA can guaranty a bond at $6.5 million. It also requires that 
the $6.5 million limit be adjusted for inflation in accordance with 41 
U.S.C. 1908. Section 411(a)(1)(B) established that the $6.5 million 
limit can be exceeded up to a $10 million maximum if a contracting 
officer of a Federal agency certifies that such a guaranty is 
necessary.
    To implement the inflation adjustment of the $6.5 million 
threshold, and to maintain a proportional relationship between the 
lower contract maximum and the upper contract maximum, the definition 
of ``Applicable Statutory Limit'' found in Sec.  115.10 is revised by 
removing $6.5 million and replacing it with $9 million, and by removing 
$10 million and replacing it with $14 million in Sec.  115.12(e)(3).
    For the same reason as for the definition of ``Applicable Statutory 
Limit'' found in Sec. Sec.  115.10, and 115.12(e)(3) is revised by 
removing $6,500,000 and replacing it with $9,000,000, and by removing 
$10,000,000 and replacing it with $14,000,000.

X. Request for Comments

    SBA invites public comments on this proposed rule, especially on 
the following issues:
    1. SBA welcomes comments from interested parties on SBA's size 
standards methodology for inflation adjustment to the statutory 
alternative size standard. Specifically, SBA seeks comment on whether 
the GDP price index is an appropriate measure of inflation for 
adjusting the alternative size standard. The Agency invites 
suggestions, along with supporting data and analysis, if a different 
measure of inflation would be more appropriate.
    2. SBA seeks comment on whether the inflation-adjusted level of the 
interim statutory alternative size standard (i.e., $15 million in 
tangible net worth and $5 million in average net income, as of 2010) is 
appropriate as a new permanent alternative size standard under the 
current credit environment. SBA also invites data and supporting 
analysis for supporting or not supporting the statutory alternative 
size standard as a permanent alternative size standard.
    3. SBA seeks comment on the impact of using the statutory 
alternative size standard as the permanent alternative size standard on 
small businesses seeking loans through its Business Loan Programs. SBA 
also welcomes data on the number of businesses approved for SBA's 
Business Loans under the statutory alternative size standard that 
otherwise could not have been approved under their industry-based size 
standards.
    4. SBA invites suggestions on sources of relevant data and 
information, especially tangible net worth and average net income of 
applicants to SBA's Business Loan Programs, that SBA can evaluate to 
assess the impact on small businesses of using the statutory 
alternative size standard as the new permanent alternative size 
standard.
    5. SBA invites comments on its methodology for adjusting statutory 
contract limits for its SBG Program, especially on SBA's approach to 
adjust the $10 million contract limit for Federal contracts. SBA also 
seeks comment on impacts the inflationary adjustment for contract 
limits would have on small businesses seeking surety bonds.

XI. Compliance With Executive Order 12866, the Regulatory Flexibility 
Act (5 U.S.C. 601-612), Executive Orders 13563, 12988, and 13132, and 
the Paperwork Reduction Act (44 U.S.C., Ch. 35)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a significant regulatory action for purposes of 
Executive Order 12866. This proposed rule would affect applicants for 
SBA's 7(a) Business and CDC/504 Loan Programs and, and businesses and 
sureties that use the SBG Program. To help explain the need for this 
rule and the rule's potential benefits and costs, SBA is providing 
below a Regulatory Impact Analysis for this rule.

Regulatory Impact Analysis

1. What is the need for this regulatory action?
    SBA is required by the Jobs Act to adopt an alternative size 
standard based on tangible net worth and net income after taxes for its 
7(a) and CDC/504 Loan Programs. SBA believes that adopting an 
alternative size standard is in the best interests of small businesses 
seeking SBA's financial assistance. SBA's

[[Page 48755]]

mission is to aid and assist small businesses through a variety of 
financial, procurement, business development, and counseling programs. 
To assist the intended beneficiaries of these programs effectively, SBA 
establishes distinct definitions (usually referred to as ``size 
standards'') to determine which businesses are deemed small businesses. 
One of the SBA's missions has been to provide necessary financing to 
small businesses that are not able to obtain loans in the commercial 
market in reasonable terms. Many businesses that have exceeded their 
industry-based size standards cannot grow and support their employees 
without additional capital from SBA's financial assistance programs. 
The alternative size standard established by Congress assisted some 
small businesses that could not have otherwise qualified under their 
industry-based size standards.
    SBA is required to assess the impact of inflation on its monetary-
based size standards at least once every five years (67 FR 3041 
(January 23, 2002) and 13 CFR 121.102(c)). Inflation, as measured by 
the change in GDP price index, has increased more than 34% from the 
enactment of the interim statutory alternative size standard in 2010. 
Inflation has caused the statutory alternative size standard to 
decrease in real terms, thereby forcing some businesses to lose small 
business status and eligibility for SBA's Business Loan Programs. As 
stated previously, SBA adjusted its monetary size standards three times 
since the establishment of the statutory alternative size standard in 
2010, but the Agency did not adjust the statutory alternative size 
standard for SBA's Business Loan Programs. SBA has an important policy 
objective of maintaining the value of monetary-based size standards in 
real (i.e., inflation-adjusted) terms, and by adjusting the statutory 
alternative size standard for inflation this rulemaking fulfils that 
objective.
    The Small Business Act delegates to SBA's Administrator 
responsibility for establishing definitions for small business. The Act 
requires that small business definitions vary to reflect industry 
differences. 15 U.S.C. 632(a). Some businesses in need of financial 
assistance from SBA's 7(a) and CDC/504 Loan Programs may exceed the 
applicable size standard for their industries. The alternative size 
standard, in addition to the industry-based size standards, would apply 
uniformly across all industries and expand credit opportunities to 
businesses that are in need of SBA's financial assistance. The 
inflationary adjustment of the statutory alternative size standard 
would not affect existing industry-based size standards, but would 
rather supplement them and make financing available to otherwise 
eligible applicants that exceed their industry-based size standards.
    NDAA 2013 increased the SBG guarantee limit to $6.5 million, and up 
to $10 million for a Federal contract if a Federal contracting officer 
certifies that such a guarantee is necessary. The act also included a 
provision to increase the $6.5 million limit periodically for inflation 
in accordance with 41 U.S.C. 1908. Based on the CPI, inflation has 
increased more than 30% since 2013. SBA has not adjusted its bonding 
limits since 2013. This has eroded the value of the bonding limits in 
real terms since the limits were set by Congress in 2013. The 
adjustment of the SBG contract limits will bring them in line with 
ongoing inflation and current contracting trends and increase 
contracting opportunities to small businesses.
2. What are the potential benefits and costs of this regulatory action?
    The most significant benefit of this regulatory action for 
businesses is that certain businesses, especially in industries with 
receipts-based size standards, would gain eligibility for SBA's 
Business Loan Programs for which they would not otherwise be eligible 
based on their industry-specific size standards or current alternative 
size standards. This would allow them to attain financing that may be 
critical to their continued growth or economic viability, which would 
enable them to create or support more jobs in the economy.
    Table 16, Comparison Between Industry-Based and Inflation-Adjusted 
Statutory Alternative Size Standard (FY 2021-2022), compares the 
percentages of industries that have higher industry-based size 
standards relative to inflation-adjusted statutory size standard by 
type of size standard. For nearly 96% of industries with receipts-based 
size standards, the inflation-adjusted alternative size standard is 
found to be, in relative terms, higher than the industry-based size 
standards, thereby allowing businesses exceeding industry-based size 
standards in those industries to qualify for 7(a) and CDC/504 Loan 
Programs under the inflation-adjusted alternative size standard. The 
corresponding figure for the interim statutory alternative size 
standard was nearly 93%. On the other hand, for 77% of industries with 
employee-based size standards, industry-based size standards were, in 
relative terms, higher than the inflation-adjusted alternative size 
standard. That figure for the interim statutory alternative size 
standard was 82.5%. This suggests that the alternative size standard 
provides more benefits to businesses in the receipts-based industries 
than those with employee-based size standards. The higher inflation-
adjusted alternative size standard would continue to help businesses 
above the industry-based size standards to receive SBA's financing.

          Table 16--Comparison Between Industry-Based and Inflation-Adjusted Alternative Size Standard
                                                 [FY 2021-2022]
----------------------------------------------------------------------------------------------------------------
                                  Whether industry size standard  Whether industry size standard
                                      is higher or lower than         is higher or lower than
                                   interim statutory alternative   inflation-adjusted statutory
       Size standard type               standard (Table 11)            alternative standard            Total
                                 ----------------------------------------------------------------
                                      Higher           Lower          Higher           Lower
----------------------------------------------------------------------------------------------------------------
Employee-based..................     392 (82.5%)      83 (17.5%)     366 (77.1%)     109 (22.9%)    475 (100.0%)
Receipts-based..................       35 (7.3%)     445 (92.7%)       20 (4.2%)     460 (95.8%)    480 (100.0%)
                                 -------------------------------------------------------------------------------
    Total.......................     427 (44.7%)     528 (55.3%)     386 (40.4%)     569 (59.6%)    955 (100.0%)
----------------------------------------------------------------------------------------------------------------

    Table 17, Comparison Between Industry-Based and Inflation-Adjusted 
Statutory Alternative Size Standards by Sector (FY 2021-2022), shows by 
sector the impacts of inflation adjustment to the statutory alternative 
size standard

[[Page 48756]]

on proportions of industries for which industry-based size standards 
are higher than the inflation-adjusted alternative size standard. 
Compared to the interim statutory alternative size standard, the 
proportions of industries for which alternative size standard is higher 
than the industry-based size standards are higher under the inflation-
adjusted alternative size standard, especially for industries with 
employee-based size standards. For example, for just 7.8% of industries 
in manufacturing, the statutory size alternative size standard was 
higher than the industry-based size standards. That figure increases to 
13.3% under the inflation-adjusted size standard. Another example is 
wholesale trade, where the percentage of industries for which the 
statutory alternative size standard is higher than the industry-based 
size standard increases from about 68% under the statutory alternative 
size standard to about 78% under the inflation-adjusted alternative 
size standard.

                    Table 17--Comparison Between Industry-Based and Inflation-Adjusted Statutory Alternative Size Standards by Sector
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Whether industry size standard  Whether industry size standard
                                                                              is higher or lower than         is higher or lower than
                                                                           interim statutory alternative   inflation-adjusted statutory
                Sector code                         Sector title                standard (Table 12)            alternative standard            Total
                                                                         ----------------------------------------------------------------
                                                                              Higher           Lower          Higher           Lower
--------------------------------------------------------------------------------------------------------------------------------------------------------
11........................................  Agriculture, Forestry,              0 (0.0%)     63 (100.0%)        0 (0.0%)     63 (100.0%)     63 (100.0%)
                                             Fishing and Hunting.
21........................................  Mining, Quarrying, and Oil        17 (81.0%)       4 (19.0%)      17 (81.0%)       4 (19.0%)      21(100.0%)
                                             and Gas Extraction.
22........................................  Utilities...................      12 (85.7%)       2 (14.3%)      12 (85.7%)       2 (14.3%)     14 (100.0%)
23........................................  Construction................        0 (0.0%)     30 (100.0%)        0 (0.0%)     30 (100.0%)     30 (100.0%)
31-33.....................................  Manufacturing...............     319 (92.2%)       27 (7.8%)     300 (86.7%)      46 (13.3%)    346 (100.0%)
42........................................  Wholesale Trade.............      22 (31.9%)      47 (68.1%)      15 (21.7%)      54 (78.3%)     69 (100.0%)
44-45.....................................  Retail Trade................        0 (0.0%)     57 (100.0%)        0 (0.0%)     57 (100.0%)     57 (100.0%)
48-49.....................................  Transportation and                15 (27.8%)      39 (72.2%)      12 (22.7%)      42 (77.8%)     54 (100.0%)
                                             Warehousing.
52........................................  Finance and Insurance.......        0 (0.0%)       16 (100%)        0 (0.0%)     16 (100.0%)     16 (100.0%)
53........................................  Real Estate and Rental and        10 (41.7%)      14 (58.3%)       6 (25.0%)      18 (75.0%)     24 (100.0%)
                                             Leasing.
54........................................  Professional, Scientific,           3 (6.3%)      45 (93.8%)        3 (6.3%)      45 (93.8%)     48 (100.0%)
                                             and Technical Services.
55........................................  Management of Companies and         0 (0.0%)      2 (100.0%)        0 (0.0%)      2 (100.0%)      2 (100.0%)
                                             Enterprises.
56........................................  Administrative and Support          0 (0.0%)     44 (100.0%)        0 (0.0%)     44 (100.0%)     44 (100.0%)
                                             and Waste Management and
                                             Remediation Services.
61........................................  Education Services..........       3 (17.6%)      14 (82.4%)       2 (11.8%)      15 (88.2%)     17 (100.0%)
62........................................  Health Care and Social              3 (7.7%)      36 (92.3%)        3 (7.7%)      36 (92.3%)     39 (100.0%)
                                             Assistance.
71........................................  Arts, Entertainment, and           9 (36.0%)      16 (64.0%)       4 (16.0%)      21 (84.0%)     25 (100.0%)
                                             Recreation.
72........................................  Accommodation and Food              1 (6.7%)      14 (93.3%)        0 (0.0%)     15 (100.0%)     15 (100.0%)
                                             Services.
81........................................  Other services..............       5 (11.6%)      38 (88.4%)        4 (9.3%)      39 (90.7%)     43 (100.0%)
                                           -------------------------------------------------------------------------------------------------------------
    Total.................................  ............................     427 (44.7%)     528 (55.3%)     386 (40.4%)     569 (59.6%)    955 (100.0%)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    SBA cannot make a precise determination of the number of businesses 
that were approved under the alternative size standard for 7(a) or CDC/
504 Business Loans since the enactment of the statutory alternative 
size standard in 2010, because the Agency does not store the data on 
whether an applicant for its 7(a) or CDC/504 Loan Program was qualified 
under its industry-based size standard or under the alternative size 
standard. The available data show that the alternative size standard 
established by Congress enabled some small businesses above the 
industry-based size standards to get SBA's financing. However, SBA is 
still seeking public comment regarding the regulation's specific 
impact.
    As stated elsewhere, SBA also does not compile the data on average 
annual receipts, net worth, and net income. The only available data on 
business size is the number of employees. SBA examined its 7(a) and 
CDC/504 loan data for fiscal years 2021-2022. Based on this data, SBA 
estimates that 500 recipients of the SBA Business Loans (or 0.4% of the 
total loans) that appeared to have exceeded their industry-based size 
standards were granted 7(a) and CDC/504 loans, implying that most 
likely they qualified under the statutory alternative size standard. 
Thus, this result indicates that the higher interim alternative size 
standard expanded credit availability to more small businesses through 
SBA's 7(a) and CDC/504 Loan Programs. The even higher inflation-
adjusted alternative size standards would further expand the financing 
to small businesses that would not have otherwise qualified under the 
interim alternative size standard or under the industry-based size 
standards. This would lead to more business formation, 
entrepreneurship, job growth, and community development.
    Table 18, Applicant's Eligibility Under the Inflation-Adjusted 
Statutory Alternative and Industry-Based Size Standards (FY 2021-2022), 
shows the eligibility of recipients of SBA loans through 7(a) and CDC/
504 Programs during fiscal years 2021-2022 under the industry-based and 
inflation-adjusted alternative size standard. More than 99.5% (i.e., 
117,327/117,882 = 0.9953) of loan recipients were found to have met 
both the industry-based size standards and the inflation-adjusted 
alternative size standard. As in the case of the statutory alternative 
size standard, about 500 or 0.4% of loan recipients that did not meet 
the industry-based size standard met inflation-adjusted alternative 
size standard. About 0.1% (i.e., 94/117,882 =

[[Page 48757]]

0.001) of loan recipients were found to have exceeded the interim 
statutory alternative size standard. That figure was 0.05% (i.e., 54/
117,882 = 0.0005) for the inflation-adjusted alternative size standard. 
Thus, 40 loan recipients that did not meet the statutory size standard 
met the inflation-adjusted alternative size standard.

                 Table 18--Applicant's Eligibility Under the Inflation-Adjusted Statutory Alternative and Industry-Based Size Standards
                                                                     [FY 2021-2022]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Interim statutory alternative  Inflation-adjusted alternative
                                                                              size standard (Table 5)              size standard
                                                                         ----------------------------------------------------------------      Total
                                                                               Meets       Does not meet       Meets       Does not meet
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry size standard....................  Meets.......................         117,288              81         117,327              42         117,369
                                            Does not meet...............             500              13             501              12             513
                                                                         -------------------------------------------------------------------------------
    Total.................................  ............................         117,788              94         117,828              54       * 117,882
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Note: This excludes invalid or incomplete observations in the form of invalid NAICS codes or missing RMA or receipts-to-employee ratios to estimate
  tangible net worth, net income, or receipts equivalent size standard.

    Based on the data for 2017 Economic Census, Agricultural Census, 
and County Business Patterns special tabulations, SBA estimated that 
about 6,275 businesses that are above the interim statutory alternative 
size standard would qualify under the inflation-adjusted alternative 
size standard. About 25 additional SBA Business Loans, totaling up to 
$50 million, would be made to these newly-qualified businesses using 
the higher inflation-adjusted alternative size standard. That 
constitutes less than 0.1% of the loan activity during fiscal years 
2021-2022. These results are consistent with results in Tables 7 and 8 
(above) which showed that only a very small fraction of the SBA 
Business Loans and loan amount go to businesses that were close to the 
tangible net worth and net income thresholds of the statutory size 
standard. As discussed previously, the results in Tables 7 and 8 
(above) showed that the vast majority of SBA Business Loans go to 
businesses that are significantly below the tangible net worth and net 
income thresholds of the statutory alternative size standard.
    The 7(a) Loan Program, SBA's largest loan program, includes 
financial help for businesses with special requirements. Small 
businesses can use SBA's 7(a) guaranteed loans for short and long term 
working capital, revolving funds based on inventory or receivables, 
fixed assets, and refinancing. Small businesses can use SBA's CDC/504 
loans for the purchase of land, buildings, improvements, and equipment. 
These loans provide long-term, fixed-rate financing to small businesses 
to acquire real estate or machinery or equipment for expansion or 
modernization. The CDC/504 loan proceeds are generally limited to fixed 
assets and their related soft costs.
    Businesses are often denied SBA's loans for reasons unrelated to 
the use of the loan proceeds, the concern's ability to repay the loan, 
or other credit based reasons. Rather, they can be denied because they 
exceed the size standards for their industries. Some business concerns 
that exceed their industry-based size standards might be eligible for 
SBA's financial assistance under the alternative size standard that 
this proposed rule adopts.
    Raising the SBG bond guarantee limits would increase contracting 
opportunities for more small businesses and bring the limits in line 
with inflation. Due to the lack of data, SBA is unable to estimate the 
number of additional small businesses that would qualify to apply for 
bonding through the SBG Program for non-Federal (e.g., state 
government, local government, private-sector, etc.) contracting because 
of proposed increases to bond guarantee limits for inflation. Because 
the construction sector accounts for more than 95% of surety bonds and 
total value of bonded contracts, to estimate the number of additional 
small businesses and contracts that would qualify for surety bonds on 
Federal contracts, SBA analyzed the small business contract awards from 
FPDS-NG for the construction sector for fiscal years 2021-2022. These 
results are presented in Table 19, Federal Contracts in Construction 
for Fiscal Years 2021-2022. Because of the proposed increase to the 
lower contract limit from $6.5 million to $9 million, without 
contracting officer's certification, annually up to about 150-155 
additional small businesses would be eligible to apply for surety bonds 
on about 175-180 Federal construction contracts totaling between $1.4 
billion and $1.5 billion in value. Similarly, as a result of the 
proposed increase to the upper contract limit from $10 million to $14 
million, with contracting officer's certification, annually up to about 
100-110 additional small businesses would be eligible to apply for 
surety bonds on 110-120 Federal construction contracts totaling between 
$1.3 billion and $1.4 billion in value. This increase in small business 
contracting would support job creation and economic growth.

                     Table 19--Federal Contracts in Construction for Fiscal Years 2021-2022
----------------------------------------------------------------------------------------------------------------
                                                                                                  Total contract
                         Contract limits                             Number of       Number of       value ($
                                                                    small firms      contracts       billion)
----------------------------------------------------------------------------------------------------------------
<=6.5 million...................................................           6,100          25,312            10.7
>$6.5 million <=$9 million......................................             155             179             1.4
>9 million <=$10 million........................................              45              45             0.4
>$10 million to <=$14 million...................................             106             115             1.3
>$14 million....................................................             142             172             5.3
                                                                 -----------------------------------------------

[[Page 48758]]

 
    Total.......................................................           6,547          25,822            19.1
----------------------------------------------------------------------------------------------------------------

    Raising the contract bond limits could lead to larger contracts 
being guaranteed by the SBA and, as a result, could increase the risk 
of program losses. To determine if higher contract limits would 
increase the risk of program losses, SBA analyzed all claim activity 
from October 1, 2020 to March 31, 2023. These results are presented in 
Table 20, Net Claims by Contract Size for October 1, 2020 to March 31, 
2023. The results showed a positive relationship between contract size 
and net claims. For example, contracts below $1 million in value 
accounted for nearly 66% of total claims but accounted for only 29% of 
net claim amount. On the other hand, contracts above $1 million in 
value accounted for 34% of claims but accounted for 71% of total net 
claim amount. Thus, the data suggest that higher contract limits may 
lead to larger contracts being guaranteed, which in turn may lead to an 
increase in defaults and, as a result, higher losses. However, SBA is 
unable to estimate exact losses due to the lack of data to estimate the 
number of additional surety bonds on non-Federal contracts resulting 
from increases to contract bond limits.

                                       Table 20--Net Claims by Contract Size for October 1, 2020 to March 31, 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Number of claims                                    Net claim
                                                         -----------------------------------------------------------------------------------------------
                Contract size ($ million)                                                                    Amount ($
                                                               Count             %            Cum. %         million)            %            Cum. %
--------------------------------------------------------------------------------------------------------------------------------------------------------
<0.1....................................................              12             5.8             5.8            $0.5             0.9             0.9
0.1 to 0.25.............................................              32            15.4            21.2             2.3             4.3             5.2
0.25 to 0.5.............................................              50            24.0            45.2             4.2             7.9            13.1
0.5 to 1.0..............................................              43            20.7            65.9             8.5            16.1            29.3
1.0 to 2.0..............................................              44            21.2            87.0            17.7            33.5            62.8
2.0 to 3.0..............................................               8             3.8            90.9             5.1             9.6            72.4
3.0 to 4.0..............................................              10             4.8            95.7             5.5            10.5            82.9
4.0 to 5.0..............................................               7             3.4            99.0             5.0             9.4            92.3
5.0 to 6.5..............................................               2             1.0           100.0             4.1             7.7           100.0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             208           100.0  ..............            52.7           100.0  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Increasing the interim alternative size standard applicable to 
SBA's 7(a) and CDC/504 Loan Programs for inflation and enabling more 
small businesses to obtain SBA's financing as a result would entail no 
additional implementation or operational costs as the necessary 
administrative and regulatory requirements are already in place. Same 
holds true for proposed inflationary increases to contract limits for 
the SBG program.

Initial Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this proposed rule, if 
adopted, may have a significant impact on a substantial number of small 
entities. As described above, this proposed rule could affect small 
entities seeking assistance through SBA's (7a) and CDC/504 Loan and SBG 
Programs.
    Immediately below, SBA sets forth an initial regulatory flexibility 
analysis (IRFA) of this proposed rule addressing the following 
questions: (1) What are the need for and objective of the proposed 
rule?; (2) What are SBA's description and estimate of the number of 
small entities to which the proposed rule would apply?; (3) What are 
the projected reporting, record keeping, and other compliance 
requirements of the proposed rule?; (4) What are the relevant Federal 
Government rules that may duplicate, overlap, or conflict with the 
proposed rule?; and (5) What alternatives will allow the Agency to 
accomplish its regulatory objectives while minimizing the impact on 
small entities?
(1) What are the need for and objective of the rule?
    Under the Jobs Act, SBA is required to adopt an alternative size 
standard using maximum tangible net worth and net income for its 7(a) 
and CDC/504 Loan Programs. The Jobs Act defined an interim statutory 
alternative standard based on tangible net worth of $15 million and net 
income of $5 million until the SBA Administrator permanently designates 
an alternative size standard based on tangible net worth and net income 
for those programs. Many businesses that exceed their industry-based 
size standards cannot grow and support their employees and other 
businesses that depend on them without additional capital from SBA's 
financial assistance programs. The proposed inflation-adjusted 
alternative size standard would enable such businesses to qualify for 
SBA's 7(a) and CDC/504 Loan Programs.
    Section 3(a) of Small Business Act (15 U.S.C. 632(a)) gives the 
SBA's Administrator responsibility to establish and change small 
business size standards. Within its administrative discretion, SBA 
implemented a policy in its regulations to review the effect of 
inflation on size standards at least once every five years (13 CFR 
121.102(c)) and make any changes as appropriate. SBA has adjusted its 
monetary-based size standards three times since the enactment of the 
interim statutory alternative size standard in 2010. However, SBA did 
not adjust the statutory alternative in each of those adjustments. 
Inflation, as measured by the change in GDP price index, has increased 
more than 34% since 2010. This has eroded the value of the statutory 
alternative size alternative in real terms. Consequently, many 
businesses above their industry-based size standards and in need of 
financial assistance from SBA's 7(a) or CDC/504

[[Page 48759]]

Loan Programs may have exceeded the statutory alternative size standard 
and lost eligibility for benefits of those programs. The inflationary 
adjustment of the statutory alternative size standard in this proposed 
rule will enable such businesses to qualify for those programs. The 
alternative size standard applies uniformly across all industries and 
does not affect existing size standards by industry. Rather it 
supplements them, by making more financing available to otherwise 
ineligible businesses that exceed their industry-based size standard.
    Regarding the SBG Program, NDAA 2013 increased the SBG guarantee 
limit to $6.5 million, and up to $10 million for a Federal contract if 
a Federal contracting officer certifies that such a guarantee is 
necessary. The act also included a provision to increase the $6.5 
million limit periodically for inflation in accordance with 41 U.S.C. 
1908. Based on the CPI, inflation has increased more than 30% since 
2013. SBA has not adjusted its bonding limits since 2013. This has 
eroded the value of the bonding limits in real terms since the limits 
were set by Congress in 2013. This has adversely impacted small 
business contractors seeking bonding assistance from the SBA SBG 
Program. The adjustment of the SBG contract limits will bring them in 
line with ongoing inflation and current contracting trends and increase 
contracting opportunities to small businesses.
(2) What are SBA's description and estimate of the number of small 
entities to which this proposed rule would apply?
    This rule would apply to more than 8.1 million employer firms, of 
which 98.2% are small under industry-based size standards and 92.5% are 
small under the interim statutory alternative size standard. About 
92.6% of firms would qualify as small under the inflation-adjusted 
alternative size standard. About 6,275 firms that are above the interim 
statutory alternate size standard would qualify as small under the 
inflation-adjusted size alternative standard. That is less than 0.1% of 
firms that are small under the interim statutory alternative size 
standard.
    For the reasons provided elsewhere in this rule, because of lack of 
relevant data (e.g., receipts, tangible net worth and net income of 
loan recipients), SBA cannot precisely state the number of businesses 
that were approved under the alternative size standard for 7(a) or CDC/
504 loans and the number of newly-defined small businesses that will 
qualify under the inflation-adjusted alternative size standard for 
loans under these programs. However, based on the analysis of the 
available data for fiscal years 2021-2022, SBA estimates that at least 
500 7(a) or CDC/504 loans (or 0.4% of total loans) were likely approved 
under the alternative size standard that otherwise would not have 
qualified under the industry-based size standard.
    With respect to the SBG program, more than 95% of the bonding 
activity is concentrated in the construction sector. Based on the 2017 
Economic Census, there are 689,260 small employer firms in construction 
to which this proposed rule would apply. Additionally, about 2.5% of 
the bonding activity occurs in 11 industries in Sector 56 with more 
than 209,000 small firms in those industries to which this rule would 
also apply. More small businesses would qualify to apply for surety 
bonds as a result of proposed increases to statutory bonding limits.
(3) What are the projected reporting, record keeping, and other 
compliance requirements of the proposed rule?
    A new size standard does not impose any additional reporting, 
record keeping, or compliance requirements on small entities. Revising 
size standards alters the access to SBA programs that assist small 
businesses, but does not impose a regulatory burden as the size 
standards neither regulate nor control business behavior.
(4) What are the relevant Federal Government rules that may duplicate, 
overlap, or conflict with the rule?
    This proposed rule does not overlap with other Federal rules 
because it is limited to SBA's own 7(a) and CDC/504 Loan Programs.
(5) What alternatives will allow the Agency to accomplish its 
regulatory objectives while minimizing the impact on small entities?
    There are no alternatives to establishing a size standard for the 
Agency's 7(a) and CDC/504 Loan Programs based on an applicant's 
tangible net worth and net income because this is a statutory 
requirement. Specifically, the Jobs Act directs the Agency to use a 
firm's tangible net worth of not more than $15 million and average net 
income after Federal income taxes (excluding any carry-over losses) for 
the two full fiscal years immediately before its application is not 
more than $5 million until the Administrator adopts a different, 
permanent alternative size standard based on net worth and net income 
measures. SBA has proposed to make the interim statutory alternative 
size standard as a permanent alternative size standard, subject to 
adjustment for inflation that has occurred since the standard's 
establishment in 2010. SBA has requested information from the public on 
using the interim statutory alternative size standard as the permanent 
alternative size standard and on adjusting it for inflation.

Executive Order 13563

    A description of the need for this proposed regulatory action and 
its associated benefits and costs associated with this action, 
including possible impacts that relate to Executive Order 13563 are 
included above in the Regulatory Impact Analysis. This proposed rule 
will, if adopted, further expand the benefits of the Jobs Act which 
also increased the upper limits of loans available under the 7(a) and 
CDC/504 Loan Programs, without restricting their access and 
availability to qualified entities. By increasing the SBG statutory 
contract limits would increase contracting opportunities to small 
businesses.

Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. This rule does not 
have retroactive or preemptive effect.

Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined this 
rulemaking will not have substantial, direct effects on the States, on 
the relationship between the National Government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government. Therefore, SBA has determined that this proposed rule 
has no federalism implications warranting preparation of a federalism 
assessment.

Paperwork Reduction Act

    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA has determined that this rulemaking will not impose any new 
reporting or record keeping requirements.

List of Subjects

13 CFR Part 115 and 13 CFR Part 121

    Administrative practice and procedure, Government property, Grant 
programs--business, Individuals with disabilities, Loan programs--
business, Reporting and recordkeeping

[[Page 48760]]

requirements, Bonding, Surety, Small businesses.

    For the reasons set forth in the preamble, SBA proposes to amend 13 
CFR part 115 and 13 CFR part 121 as follows:

0
1. The authority citation for part 115 continues to read as follows:

    Authority:  5 U.S.C. app 3; 15 U.S.C. 636i, 687b, 687c, 694a, 
and 694b note.

PART 115--SURETY BOND GUARANTEE

0
2. Amend Sec.  115.10 by revising the definition of ``Applicable 
Statutory Limit'' to read as follows:


Sec.  115.10  Definitions.

    Applicable Statutory Limit means the maximum amount, set forth 
below, of any Contract or Order for which SBA is authorized to 
guarantee, or commit to guarantee, a Bid Bond, Payment Bond, 
Performance Bond, or Ancillary Bond:
    (1) $9 million (as adjusted for inflation in accordance with 41 
U.S.C. 1908);
    (2) $14 million if a contracting officer of a Federal agency 
certifies, in accordance with section 115.12(e)(3), that such guarantee 
is necessary; or
    (3) if SBA is guaranteeing the bond in connection with a 
procurement related to a major disaster pursuant to section 12079 of 
Public Law 110-246, see section 115.12(e)(4).
0
3. Amend Sec.  115.12 by revising paragraph (e)(3) to read as follows:


Sec.  115.12  General program policies and provisions.

* * * * *
    (e) * * *
    (3) Federal Contracts or Orders in excess of $9,000,000 (as 
adjusted for inflation in accordance with section 1908 of title 41, 
United States Code). SBA is authorized to guarantee bonds on Federal 
Contracts or Orders greater than $9,000,000 (as adjusted for inflation 
in accordance with 41 U.S.C. 1908), but not exceeding $14 million, upon 
a signed certification of a Federal contracting officer that the SBA 
guarantee is necessary. The certification must be either express mailed 
to SBA, Office of Surety Guarantees, 409 Third Street SW, Washington, 
DC 20416 or sent by email to [email protected], and include the 
following additional information:
    (i) Name, address and telephone number of the small business;
    (ii) Offer or Contract number and brief description of the 
contract; and
    (iii) Estimated Contract value and date of anticipated award 
determination.
* * * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
4. The authority citation for Part 121 continues to read as follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, 694a(9), 
and 9012.

0
5. Amend Sec.  121.301 by revising paragraphs (a), (b), (b)(2), and (e) 
to read as follows:


Sec.  121.301  What size standards and affiliation principles are 
applicable to financial assistance programs?

* * * * *
    (a) For Business Loans (other than for 7(a) Business Loans)) and 
for Disaster Loans (other than physical disaster loans), an applicant 
business concern must satisfy two criteria:
* * * * *
    (b) For 7(a) Business Loans and Development Company programs, an 
applicant business concern must meet one of the following standards:
    (1) * * *
    (2) Including its affiliates, tangible net worth not in excess of 
$20 million, and average net income after Federal income taxes 
(excluding any carry over losses) for the preceding two completed 
fiscal years not in excess of $6.5 million. * * *
* * * * *
    (e) The applicable size standards for purposes of SBA's financial 
assistance programs, excluding the Surety Bond Guarantee assistance 
program, are increased by 25% whenever the applicant agrees to use all 
of the financial assistance within a labor surplus area. The U.S. 
Department of Labor (DOL) issues the Labor Surplus Area (LSA) list on a 
fiscal year basis on its website at www.dol.gov/agencies/eta/lsa.
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-15899 Filed 7-27-23; 8:45 am]
BILLING CODE 8026-09-P