On July 28, things were all-a-buzz at JRB with the announcement of SBA’s Proposed Rule to change the alternative size standard for 7(a) and CDC/504 loans. Earth shattering news, in a way. It’s been a long time coming. Thirteen years in fact.

 Here’s Some History. Way back in 2010, Congress directed SBA to establish an alternative size standard for its loan programs using both the maximum tangible net worth and the average net income for SBA applicants. Recognizing that sometimes agencies tarry awhile in issuing polices and procedures, Congress established interim size standards known as the “alternative size standards” which applied to SBA’s Business Loan Programs.

I am sure you know them by heart since they’re much easier to memorize than the industry size standards which vary from NAICS to  NAICS. You probably have them on your website or in print: “Not more than $15 million in tangible net worth and of not more than $5 million in  average net income after taxes for the two full fiscal years before the date of the application.” “Interim” is the key word here. Congress intended these to be interim size standards, lasting only until SBA issued new size standards for the Business Loan Programs through rulemaking.

 Fast Forward, 13 Years. Bringing You Up to Date. In the 13 years since, there has been no new rulemaking regarding SBA’s size standards. Check it out: Look up size standards in 13 CFR 120.301(b)(2), and you’ll see that the alternative size standards are the same ones that existed prior to the interim size standards set in 2010: Tangible net worth of $8.5 million and net income of $3 million. How often lenders have violated those standards!

 The Solution? A New Notice of Course! So on July 28, 2023, SBA issued a Proposed Rule: 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.

Great News: This Rule would change the new alternative size standard to include businesses with not more than $20 million in tangible net worth and not more than $6.5 million in average net income after federal income taxes (excluding any carryover losses) for the preceding two years for the Applicant and its affiliates.

 Whoa, It’s a Proposed Rule. Now don’t get on your horses yelling ”Yippee!” as you ride off to haul in some bigger, fatter deals. This is a proposed rule only. Comments are due back to SBA on or before September 26, 2023. And even then, things can change or at least be delayed a long time, (13 years?) But SBA lenders are a very patient lot. Meanwhile, there are loans to make to expand the economy and create new jobs all over the  place.

Richard Jeffrey
Senior Associate