Are you economically disadvantaged?

The U.S. Small Business Administration (SBA) 8(a) Business Development program was established to assist small, disadvantaged businesses.  The nine-year program provides financial, technical, and mentoring assistance, among various other forms of support.  The goal of the program is to help small businesses compete in the Federal marketplace.  To be eligible for the 8(a) program, a business must be a majority owned and controlled by a U.S. citizen who is economically disadvantaged.  So, what exactly does that mean?  Let’s take a look at the definition of economically disadvantaged individuals and then look at how it is practically applied during the application process. 

According to 13 CFR 124.104 (a),
 
“…Economically disadvantage individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.”
 
In short, economically disadvantaged individuals are individuals who have experienced difficulties in competing in the business world because of their identity as members of a specific group.  These groups include, but are not limited to, Native Americans, African Americans, Hispanic Americans, and Asian Americans.
 
As part of the 8(a) application, SBA will look at a couple of things to determine economic disadvantage.  First, SBA will look at your economic disadvantage narrative.  In this narrative, you will write out and explain in detail specific instances that have hindered your ability to get into and succeed in business.  For example, you can note specific challenges you’ve experienced during your education and professional career, and struggles as you established your business.
 
Second, SBA will look at your personal finances, including your taxes and personal financial statement or SBA Form 413.  SBA has established thresholds that an individual must meet in order to be considered economically disadvantaged.  In our experience, this financial component is what SBA will largely base their determination on.
 
The financial thresholds at the time of application are:

• Personal net worth less than $250,000.  Personal net worth is calculated by subtracting liabilities from assets.  Certain items are not included in this calculation such as the value of your primary residence, retirement accounts that you do not have access to without penalty, and the value of your interest in the applicant business.
• Average three year adjusted gross income less than $250,000.
• Fair market value of all assets cannot exceed $4 million.

 
To determine your personal net worth, SBA will look at your SBA Form 413 or Personal Financial Statement. Below is the most recent SBA Form 413.  It can also be downloaded from SBA's website (click here).

On the left column you need to identify all of your assets.  On the right column you need to identify all of your liabilities.  Please note that if you are married both spouses need to complete a SBA Form 413, even if only one spouse is an owner or principal of the applicant business.  Also, if you are married you would split any joint assets or liabilities in half.  For example, if you have a joint savings account that has a balance of $100, each spouse would include $50 on their 413 form. 
 
Here are some general tips when completing your SBA Form 413:

• Make sure you accurately list all of your assets and liabilities.  SBA will verify that you disclosed all of this information and that the information disclosed is in fact accurate.  SBA will pull your credit report and will use third party sources.  For example, SBA has used Zillow to verify the value of real estate.
• If the line item has a corresponding section, make sure to complete it.  For example, if you have an IRA or Retirement Account, you would need to provide a description of that account or accounts in Section 4 of the form.
• In “Other Property” under assets include the value of your personal household goods, computers, and other items of value.
• SBA may come back and ask you to verify certain amounts so be sure to have documentation. 

 
Before you move forward with pursuing the 8(a) program, it is imperative that you qualify as economically disadvantaged.  If you need assistance with determining your eligibility or if have questions about the 8(a) program and the application process, please contact Holomua Consulting Group at (808) 369-9710 or via e-mail at info@holomuaconsuting.com.