As we discussed in a previous article, the Coronavirus Aid, Relief, and Economic Security Act, known as the “CARES Act,” provides much-needed relief to “small” businesses in several areas, including by appropriating substantial money to support the 7(a) Loan Program and the Economic Injury Disaster Loan (EIDL) Program.
However, determining whether one’s business is, in fact, an eligible “small” business has already proven to be confusing and complicated, even for sophisticated applicants. Even more perplexing to many is the question of whether a business is legally “affiliated” with another business, such that the businesses will be viewed together for loan eligibility purposes and, when combined, may not be considered an eligible “small” business.
This article, accordingly, aims to provide a user-friendly guide on these threshold small business loan program eligibility issues.
The following concerns are eligible under the CARES Act for the 7(a) Loan Program: (1) small business concerns, nonprofit organizations, veterans’ organizations, and tribal business concerns in each case with 500 or fewer employees; (2) business concerns that already met the applicable size standard for their industry as provided by the normal Small Business Administration (SBA) rules, if those rules permitted a small business to have more than 500 employees, or if the business qualified as small based on a revenue-based size standard; (3) sole proprietors, independent contractors, and other self-employed individuals; and (4) business concerns in the Accommodation and Food Service industries with more than one physical location so long as that business concern does not have more than 500 employees per physical location.
The following concerns are eligible under the CARES Act for the EIDL Program: (1) business concerns with not more than 500 employees; (2) small business concerns that already met the applicable size standard for the industry as provided by the SBA, if the number of employees is greater than 500; (3) private nonprofit organizations; (4) small agricultural cooperatives; (5) any individual who operates under a sole proprietorship or as an independent contractor; (6) a cooperative with not more than 500 employees; (7) an employee stock ownership plan (ESOP) with not more than 500 employees; and (8) tribal small business concerns with not more than 500 employees.
While the foregoing criteria for both programs may seem straightforward, as noted above, the question of whether a business is, in fact, “small” has proven to be complicated and confusing even for sophisticated applicants. This is primarily because of the so-called “affiliation” rules that are set forth in the SBA’s regulations. Under the SBA’s regulations, if an entity is determined to be an “affiliate” of another entity, the SBA will combine the employees/annual receipts of the entities to determine whether the applicant entity is “small.”
Section 1102 (Paycheck Protection Program) of the CARES Act references the SBA’s existing general “affiliation” regulations (13 C.F.R. § 121.103). Subsection (a)(8) of the SBA’s general “affiliation” regulations, in turn, states: “For applications in SBA’s Business Loan, Disaster Loan, and Surety Bond Guarantee Programs, the size standards and bases for affiliation are set forth in [13 C.F.R.] § 121.301.”
Subsection (f) of 13 C.F.R. § 121.301, in turn, addresses “affiliation” issues in the context of SBA loan programs, such as the 7(a) Loan Program and the EIDL Program, stating: “Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”
The SBA’s regulations state that “[a]ffiliation under any of the circumstances described below is sufficient to establish affiliation” for an applicant of these loan programs.
General
Affiliation may arise among two or more individuals or firms with an “identity of interest.” Individuals or firms that have identical or substantially identical business or economic interests (such as close relatives, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.
Close Relatives
Affiliation arises when there is an “identity of interest” between close relatives, with identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area).
Common Investments
Affiliation arises through common investments where the same individuals or firms together own a substantial portion of multiple concerns in the same or related industry, and such concerns conduct business with each other, share resources, equipment, locations, or employees with one another, or provide loan guaranties or other financial or managerial support to each other. However, where an SBA lender has made a determination of no affiliation under these grounds, SBA will not overturn that determination as long as it was reasonable when made given the information available to the SBA lender at the time.
Affiliation based upon economic dependence may arise when a concern derived more than 85% of its receipts over the previous three fiscal years from a contractual relationship with another concern, unless: (a) the contract (or contracts) does not restrict the concern in question from selling the same type of products or services to another purchaser; or (b) SBA agrees that the terms of the contract (or contracts) do not provide the purchaser with control or the power to control the seller.
The CARES Act provides exceptions to the “affiliation” rules for:
The CARES Act, moreover, did not repeal the existing exceptions to the affiliation rules, which are referenced at 13 C.F.R. § 121.301(9) and located at 13 C.F.R. 121.103(b).
Determining whether one’s business is, in fact, an eligible “small” business – or rather, is legally “affiliated” with another business such that the applicant may not actually be an eligible “small” business – has understandably proven to be a complicated and confusing task for many potential loan applicants. It is our hope that the above guide makes this important task less confusing and intimidating for small business loan applicants.
If you have any questions about CARES Act “affiliation” and small business loan eligibility issues, please feel free to contact Aron Beezley, Patrick Quigley, or Lisa Markman.
Aron Beezley is the co-leader of Bradley’s nationally ranked Government Contracts Practice Group. Ranked nationally himself in Government Contracts Law by Chambers, Law360, Benchmark Litigation, and Super Lawyers, Aron’s vast experience includes representation of government contractors in numerous industries…
Aron Beezley is the co-leader of Bradley’s nationally ranked Government Contracts Practice Group. Ranked nationally himself in Government Contracts Law by Chambers, Law360, Benchmark Litigation, and Super Lawyers, Aron’s vast experience includes representation of government contractors in numerous industries and in all aspects of the government-contracting process, including negotiation, award, performance and termination.
Patrick Quigley’s practice is focused on litigating bid protests, contract claims, prime/subcontractor disputes, and small business size protests/appeals at the Government Accountability Office, U.S. Court of Federal Claims, boards of contract appeals, federal agencies, the Small Business Administration, and state courts. He…
Patrick Quigley’s practice is focused on litigating bid protests, contract claims, prime/subcontractor disputes, and small business size protests/appeals at the Government Accountability Office, U.S. Court of Federal Claims, boards of contract appeals, federal agencies, the Small Business Administration, and state courts. He conducts internal investigations and defends clients in False Claims Act litigation, government investigations, and suspension and debarment actions. Patrick conducts due diligence reviews of and advises on the government-contract aspects of business transactions, and counsels on procurement law compliance, federal employee ethics rules, teaming agreements, and conflict-of-interest mitigation plans. View articles by Patrick.
Lisa Markman focuses her practice on construction litigation and government contracts. Lisa has experience in complex litigation, representing general contractors and subcontractors across a range of public and private projects both domestically and abroad. In her construction practice, she has represented and counseled
Lisa Markman focuses her practice on construction litigation and government contracts. Lisa has experience in complex litigation, representing general contractors and subcontractors across a range of public and private projects both domestically and abroad. In her construction practice, she has represented and counseled contractors in cases involving federal and state Miller Act claims, requests for equitable adjustment, mechanic’s liens, delay claims and surety disputes. View articles by Lisa.