Small businesses face many challenges under the best of circumstances, but those run by minorities that have been historically discriminated against can have an additional set of struggles. Many racial and ethnic groups have experienced social and economic disadvantages that place their companies in a lower position than other companies without the same barriers. However, the federal government has recognized this issue and set up eligibility criteria that give companies willing to register as disadvantaged businesses early access to federal procurement, contracts, and other benefits.
This article will explain the qualifications of a small disadvantaged business and offer tips on how to register your company as disadvantaged to participate in dedicated procurement programs.
What Is a Small Disadvantaged Business?
A small disadvantaged business (SDB) is one that can claim a minimum of 51% ownership by one or more members who qualify as economically and socially disadvantaged. The U.S. Small Business Administration (SBA) recognizes a wide range of small business concerns that can arise when companies are owned by individuals or groups that have a history of economic exclusion and has set a special SDB status for those companies in an effort to level the playing field.
The SBA defines a disadvantaged group as one that has been routinely subjected to "racial or ethnic prejudice or cultural bias." Through a business development program aimed directly at helping to correct this imbalance, the SBA allows small disadvantaged businesses to obtain a special business certification registering their SDB status. Small disadvantaged businesses that meet eligibility requirements set forth by the SBA can bid on government contracts that might otherwise be out of reach due to economic disadvantages.
Who Is Considered Socially and Economically Disadvantaged?
The SBA offers small business programs for disadvantaged individuals across several qualifying criteria. One unifying thread is that all participants must be U.S. citizens. The following groups are considered socially and economically disadvantaged by the SBA:
- African Americans
- Asian Americans
- Asian Pacific Americans
- Hispanic Americans
- Native Americans
- Subcontinent Asian Americans
- Service-disabled veterans
Other eligibility options are defined in the official guidelines set forth by the federal government. Entrepreneurs interested in SDB status who may not fit into one of the aforementioned larger categories should check the full list of criteria to find out if they are eligible in another way.
Requirements to Become a Small Disadvantaged Business
Small disadvantaged businesses must meet other special criteria to qualify for SDB status with the Small Business Administration. Beyond classification into one of the aforementioned disadvantaged persons racial, ethnic, or social groups, small business owners must also be able to demonstrate good character and the ability to perform well on any contracts received through the SDB program.
They must also show a personal net worth of $750,000 or less and an adjusted gross income of $350,000 averaged over the past three years. A net worth of $6 million or less in total assets and alignment with SBA's official small business size standards is also required for eligibility.
Before seeking SDB registration, it is important to recognize that there is more than one kind of certification program available to disadvantaged small business owners. Understanding the differences and where these programs overlap can be beneficial to your small business. All of these programs require initial registration in the federal government's System for Award Management (SAM.gov). The following list gives a short breakdown of each:
- Small Business: This designation is automatically awarded to companies meeting industry-specific size standard eligibility based on their unique NAICS code as reported by the North American Industry Classification System and requires no formal application to the SBA.
- Small Business Set Aside Program: Federal law mandates that a fair portion of the total contracts and purchases obtained for government property and services be set aside for small business concerns. Contracts in the set-aside program can only be bid on by qualified small businesses.
- Small Disadvantaged Business Certification Program (SDB): This designation pertains specifically to federal procurement and allows SDB businesses unique eligibility for bidding benefits and subcontracting opportunities. As of October 2008, qualified small businesses may self-identify their SDB status on the System for Award Management (SAM) and are no longer required to submit an application to the SBA.
- 8(a) Business Development Program: Business owners can certify for 8(a) status directly via the SBA. This designation implies a direct and tangible growth-centered relationship with the SBA wherein the small business in question is assigned a Business Opportunity Specialist (BOS). This specialist is an employee of the SBA and works to advise and coach the business. 8(a) businesses are able to compete for set-aside and sole-source contracts.
- SBA's Mentor-Protégé Program: This mentor program is offered to 8(a) companies in an effort to help them obtain federal government contracts. An assigned mentor provides the 8(a) business with subcontracting support, technical assistance, and financial aid in the form of loans or equity investments for a minimum of one year.
- HUBZone Empowerment Contracting Program: The Historically Underutilized Business Zone Program (HUBZone) offers special access to federal contracts to small businesses with a principal office located within a recognized HUBZone. This includes properties on federally acknowledged Native American reservations. A HUBZone-eligible business must be owned and operated by one or more U.S. citizens and a minimum of 35% of its employees must also reside within a HUBZone. Formal certification with the SBA is required.
The Service-Disabled Veteran-Owned Small Business Program (SDVOSB) and Women-Owned Small Business Federal Contracting Program also provide special benefits to eligible disadvantaged persons. Visit SBA.gov for more detailed information on which program might be best suited to your business needs and classification. Keep in mind that you can enroll your business in more than one small business program at a time; it is wise to apply for any certifications you feel you are eligible for.
Why Should You Classify as a Small Disadvantaged Business?
The benefits of being registered as an SDB and taking part in programs like the ones mentioned above extend far beyond subcontracts and set-asides. For example, HUBZone businesses enjoy a guarantee by federal agencies that 3% of all federal prime contracting funds and 3% of all federal subcontracting funds will be made exclusively available to them. Additionally, this program features a price evaluation adjustment of 10% in favor of HUBZone companies.
Similarly, disadvantaged business utilization by prime contractors earns them evaluation points with the federal government so they are incentivized to prioritize SDB status companies. Small business owners who are part of the SBA's Mentor-Protégé Program can take part in joint ventures and investment opportunities with established, larger companies. Companies taking part in the 8(a) Program are offered assistance with marketing, business training, guaranteed loans and bonding, and high-level executive development provided directly by the SBA.
Manage Your Small Business Finances With Skynova
For small disadvantaged businesses, accessing a federal contract in the confusing world of federal subcontractors can be difficult without special help. Thankfully, lawmakers in Washington, D.C., have put programs in place to help small disadvantaged businesses gain economic leverage.
For all other money-related items in your business, there is Skynova's accounting software. Helping you track and manage income and expenses, formalize bids, and keep up with invoices, Skynova is here for all of your business organization needs. Choose Skynova for your business bookkeeping so that you can focus on making your company the next offeror picked for a lucrative federal contract.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific small business situation. Always consult with a professional at the SBA or other affiliated government agency when making decisions about how to certify your company for disadvantaged persons benefits.