SBA POLICY PRIORITIES FOR 2025 AND BEYOND

Legislation

The new Administration can support SBA reform legislation proposed in Congress that aligns with key measures outlined in this chapter. It also can support legislative initiatives that would help SBA to focus on its core statutory activities such as capital access, federal contracting opportunities, and regulatory advocacy. For example:

The IMPROVE the SBA Act68 would strengthen accountability, transparency, and oversight of the SBA and aligns with many of the reforms outlined in this chapter.

Small-Business Size Standard Modernization. Many small-business pro- grams both inside and outside the SBA use the SBA’s definition of “small business.” Under the Small Business Act, the SBA is tasked with defining what counts as a small business and ensuring that the definition varies from industry to industry to reflect differences in regular size by industry. However, the SBA’s small-business size standards reflect a one-size-fits-all approach under which all businesses within its size standard are considered small businesses for all eligible purposes, from gov- ernment contracting preferences to eligibility for SBA loans through private banks. At the same time, the SBA is an outlier among competing economies in not considering medium-sized enterprises along with small businesses, often referred to collectively as small and medium-sized enterprises (SMEs). Medium-sized and regional businesses are increasingly critical to maintaining competition. The next Administration should:

The Small Business Regulatory Enforcement Fairness Act70 (SBREFA) panel process allows small businesses to provide input on agency rulemakings, gives participating small businesses greater procedural rights, and allows for judicial review of agency violations of the SBREFA panel process. SBREFA panel requirements should be extended to all federal agencies. The Fair and Open Competition Act71 would disallow the use of project labor agreements (PLAs) in federal contracting as required in President Biden’s Executive Order 14063,72 which puts small businesses at a competitive disadvantage and works against the SBA’s governmentwide contracting goal for small businesses.

The JOBS Act 4.073 would advance regulatory improvements and modernization of various Securities and Exchange Commission (SEC) rules to enhance capital formation and access.

The Small Business Regulatory Flexibility Improvements Act69 would require federal agencies to perform more thorough RFA economic analysis and provide a rationale for proposed regulations. It also would waive fines for certain first-time paperwork violations.

COVID-19 Lending Program Accountability and Cleanup.

A major immediate priority for the next Administration should be a final accounting and accelerated cleanup of fraudulent COVID-19 loan and grant activity. As noted by the SBA IG, “managing COVID-19 stimulus lending is the greatest overall challenge facing SBA, and it may likely continue to be for many years as the agency grapples with fraud in the programs….”40 The next Administration should:

Consider bringing in private-sector support and expertise to close out these programs. Forgiveness and fraud must be dealt with as swiftly as possible, and law enforcement officials must pursue fraud vigorously. Entities receiving PPP loans that did not meet eligibility for forgiveness must be required to pay back the money. To date, despite continued oversight attempts by Members of Congress,44 the SBA has taken no action on the Planned Parenthood loans other than to forgive them, and in 2021, it approved new PPP loans to Planned Parenthood affiliates.45 l Cooperate with ongoing congressional oversight efforts and determine whether SBA has authority to reverse the forgiveness decisions. If it does have that authority, the SBA should reverse the forgiveness decisions for the subject loans, reiterate its preliminary determinations of ineligibility, investigate the matter more thoroughly, and take all appropriate action when its investigation concludes. Regardless of whether it reverses its forgiveness, if its investigation uncovers evidence that Planned Parenthood affiliates or any other loan recipients knowingly misrepresented their eligibility in their applications, the SBA should make appropriate referrals to the Department of Justice.

For example, under the CARES Act,41 PPP loan applicants generally were eligible only if, together with all their affiliates, they had no more than 500 employees. Numerous Planned Parenthood affiliates self-certified eligibility for PPP loans during the initial wave of loans that were governed by the CARES Act’s size requirement. Many Senators and Representatives asserted that these Planned Parenthood organizations were ineligible because— considered together with their affiliates—they exceeded the maximum eligible size.42 The Trump Administration SBA notified several Planned Parenthood PPP recipients of its preliminary determination of their ineligibility and of SBA’s authority to take various actions against applicants that falsely certified their eligibility.43

Disaster Loan Program and Direct Lending. The SBA’s disaster loan pro- gram provides low-interest loans to personal, business, and nonprofit borrowers following a federally declared disaster. The program suffers from problems of coordination with Federal Emergency Management Administration (FEMA) disas- ter assistance. For example, disaster relief applicants have an incentive to avoid being approved for SBA disaster loans in order to increase the amount of FEMA assistance for which they are eligible. Moreover, the availability of disaster loans reduces individuals’ incentives to purchase disaster-related insurance. More than 90 percent of SBA disaster loans are loans to individuals such as homeowners, not to small businesses.

In view of the challenges the SBA has experienced in its administration of this program, as well as the fraud and abuse in the EIDL COVID-19–related program and the IG’s concern that the systemic problems within this lending program undermine the SBA’s work, the next Administration should:

Work with Congress to assess the extent to which disaster loans should be offered by another agency rather than the SBA and explore private-sector channels for administering the loans. Specify clearly that no new direct lending programs will be developed at the SBA.

Eligibility of Religious Entities for SBA Loans. Current SBA regulations46 and SBA Form 197147 make certain religious entities ineligible to participate in several SBA loan programs. The Trump Administration proposed a rule that would remove the provisions on the ground that they violate the First Amendment.48 Subsequent Supreme Court decisions have made their unconstitutionality clearer.49 In an April 3, 2020, letter to Congress pursuant to 28 U.S. Code § 530D,50 the Trump Administration SBA advised that two such provisions violate the Free Exer- cise Clause of the First Amendment and that it therefore would not enforce them. On January 19, 2021, the Trump Administration SBA proposed a rule to remove all of the unconstitutional religious exclusions from its regulations.51 The SBA has not acted on the proposed rule.

A similar religious exclusion once appeared in the regulation governing eligibil- ity for SBA Business Loan Programs,52 but it was removed in a June 2022 final rule that noted tension with the First Amendment and Supreme Court precedent.53 That final rule announced that the SBA would nonetheless continue to make religious eligibility determinations for business loan applicants to comply with putative Establishment Clause requirements,54 but Supreme Court precedent and Office of Legal Counsel memoranda refute the notion that large government-backed loan programs raise any Establishment Clause concerns.55

The SBA uses the same “Religious Eligibility Worksheet,” SBA Form 1971, to make eligibility determinations for all affected programs, including the Business Loan Programs. Thus, the SBA continues to act as though the unconstitutional regulation were still in place, and there is no Establishment Clause basis for doing so. The next Administration should immediately:

Notify Congress under 28 U.S. Code § 530D that it will not enforce these unconstitutional regulations. Take down SBA Form 1971. Finalize the Trump Administration’s proposed rule or publish its own updated proposed rule to remove the unconstitutional regulations.

Continue the SBIR and SBTT programs as they successfully fund the next wave of technological innovation to compete with Big Tech. Urge Congress to expand the amount that other agencies are required to set aside from their general R&D budgets for the SBIR program. Ensure the enactment of stricter rules requiring that SBIR funds must be expended on capital investments in the United States.

Small Business Innovation Research and Small Business Technology Transfer Programs. The SBA “coordinates and monitors the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) pro- grams for all federal agencies with extramural budgets for research or research and development (R/R&D) in excess of the expenditures established in sections 9(f ) and 9(n) of the Small Business Act.”56 The SBIR and STTR Extension Act of 2022 extended these programs from September 30, 2022, through September 30, 2025.57 SBIR requires that 3.2 percent of spending by agencies with extramural R&D budgets of $100 million or more must be directed to small businesses. STTR allo- cates 0.45 percent of federal research spending to small firms.58 Research has shown that this small portion of federal R&D spending is disproportionately effective.59 The SBIR program has consistently demonstrated its ability to fund advanced technologies through to private-market viability and invests more in America’s heartland than venture capital invests.60

SBIR and STTR have overcome the tendency of federal contracting officers to deal only with large firms that are familiar to them and have the expertise and lobbying clout to navigate the federal procurement process. The next Adminis- tration should:

Domestic Manufacturing and Small Business. Small businesses in the manufacturing sector face shortfalls in access to capital.61 As manufacturing employment, domestic business investment, and non–information technology output have declined,62 expectations for market returns and the capital available to small manufacturing enterprises have diminished. This is especially true for capital-intensive sectors like transportation and energy that require large up-front investments and relatively lower-margin sectors like plastics, textiles, furniture, and agriculture. Yet these industries and others like them traditionally have been the backbone of American manufacturing employment. They also are sources of self-sufficiency and resilience at a time when global supply chains are increas- ingly uncertain.

The public policy problems that are caused by declining small manufacturing are especially acute when it comes to the production of advanced technologies. Other agencies and programs invest immense taxpayer resources in basic science and research. Over time, that research results in some breakthrough technologies, but when it is time to put these breakthroughs into practice by manufacturing goods and services, much of the necessary productive capacity is offshore.63 For many technologies, the American economy lacks the capacity to “scale up” inno- vations that might not be immediately profitable. Instead, those technologies are put into practice abroad. In this way, foreign companies and foreign productive sites buy and implement taxpayer-funded American technologies. The SBA’s existing programs should be reformed to expand the private market for capital in small-manufacturer expansion. The next Administration should:

Ask Congress to make available a category of Section 7(a) loans with a larger available principal that is used to finance manufacturing facility construction and equipment upgrading. The proposed SBA Reauthorization and Improvement Act of 2019, for example, would have increased the maximum loan principal to $50 million for advanced manufacturing construction and upgrading.64 The Section 7(a) loan program operates through private lenders and guarantees a portion of private-sector loans made to qualifying small businesses. The maximum principal available is $5 million, but small businesses in capital-intensive sectors require significantly larger amounts of capital to finance up-front capital costs.

Reform the Small Business Investment Company (SBIC) program to refocus its support on small businesses rather than technology startups only. The SBIC program operates through private venture capital and private equity funds by providing eligible funds with guaranteed debt financing to support investments in small businesses. However, the program largely duplicates private-sector venture capital to the extent that the sector receiving much of its support is software and information technology, which already receive the lion’s share of venture capital investment.65 In addition, Congress should reform the SBIC program to make its financing more favorable to capital-intense investments and small manufacturers. The Health, Economic Assistance, Liability Protection, and Schools (HEALS) Act, introduced in 2020,66 and American Innovation and Manufacturing Act, introduced in 2021,67 would allow SBIC to offer longer-term financing to manufacturers and make the program more fiscally sustainable.

Encourage Congress to create a “medium-sized business” classification with its eligibility for programs confined to access to capital programs from projects for which credit elsewhere does not exist.

SBA POLICY PRIORITIES FOR 2025 AND BEYOND

Legislation.

The new Administration can support SBA reform legislation pro- posed in Congress that aligns with key measures outlined in this chapter. It also can support legislative initiatives that would help SBA to focus on its core statutory activities such as capital access, federal contracting opportunities, and regulatory advocacy. For example:

The IMPROVE the SBA Act68 would strengthen accountability, transparency, and oversight of the SBA and aligns with many of the reforms outlined in this chapter.

Small-Business Size Standard Modernization.

Many small-business programs both inside and outside the SBA use the SBA’s definition of “small business.” Under the Small Business Act, the SBA is tasked with defining what counts as a small business and ensuring that the definition varies from industry to industry to reflect differences in regular size by industry. However, the SBA’s small-business size standards reflect a one-size-fits-all approach under which all businesses within its size standard are considered small businesses for all eligible purposes, from gov- ernment contracting preferences to eligibility for SBA loans through private banks. At the same time, the SBA is an outlier among competing economies in not considering medium-sized enterprises along with small businesses, often referred to collectively as small and medium-sized enterprises (SMEs). Medium-sized and regional businesses are increasingly critical to maintaining competition. The next Administration should:

The Small Business Regulatory Enforcement Fairness Act70 (SBREFA) panel process allows small businesses to provide input on agency rulemakings, gives participating small businesses greater procedural rights, and allows for judicial review of agency violations of the SBREFA panel process. SBREFA panel requirements should be extended to all federal agencies. The Fair and Open Competition Act71 would disallow the use of project labor agreements (PLAs) in federal contracting as required in President Biden’s Executive Order 14063,72 which puts small businesses at a competitive disadvantage and works against the SBA’s governmentwide contracting goal for small businesses.

The JOBS Act 4.073 would advance regulatory improvements and modernization of various Securities and Exchange Commission (SEC) rules to enhance capital formation and access.

The Small Business Regulatory Flexibility Improvements Act69 would require federal agencies to perform more thorough RFA economic analysis and provide a rationale for proposed regulations. It also would waive fines for certain first-time paperwork violations.

ORGANIZATIONAL ISSUES AND BUDGET

Administrator and Key Staff. The position of Administrator should not be considered a symbolic or messaging-related position as some past Administrations have viewed it. Rather, the Administrator should have the requisite experience, skills, and knowledge to ensure that the SBA fulfills its statutory authorities. Because much of the SBA’s statutory authority relates to financing and reg- ulatory policy, and in order to make the SBA a more effective agency within the Administration, the Administrator and his or her key staff should have experience in small-business finance and investment and/or administrative law. For example, during the COVID-19 pandemic, the SBA was often forced to outsource key deci- sions and administrative follow-through to the Department of the Treasury. The SBA Administrator and leadership team must share the President’s mission and vision and execute the Administration’s policies effectively.

Budget

The next Administration should undertake a comprehensive review of the effectiveness of its various loan and grant programs and provide a report to Congress within six months. The report should rank programs by cost-effective- ness. In the interim, the roughly $1 billion overall agency budget should be held constant until the report is considered, after which Congress should terminate ineffective programs, consolidate duplicative functions, and reallocate resources to more effective programs (such as the Office of Advocacy) or consider reducing the SBA budget.

Personnel Challenges

The SBA continues to expand programs and initiatives without first document- ing the effectiveness of existing programs or whether they involve areas in which the agency lacks staff expertise. For example, the SBA wants to expand the number of licensed Small Business Lending Companies (SBLCs), implement a new “Mis- sion-Based SBLC,” and remove a requirement for loan authorization within the 7(a) and 504 Loan programs and rely solely on a lender’s documents. Various IG reports have noted that the lack of skilled employees within the SBA has fueled fraud and mismanagement in COVID-19 lending programs, and congressional leaders have expressed alarm about these “changes that haphazardly overextend the SBA’s responsibilities at a time when they are devastated by fraud and underperforming on their core mission of serving the nation’s 33 million small businesses.”74 A conservative Administration should rein in these idealistic and impractical efforts, get current programs under control and properly staffed with people who can manage and perform competently, and outsource efforts where private-sector expertise is appropriate and more efficient.