The challenges facing small businesses and entrepreneurs today are formidable. In addition to inherent barriers to entry into a specific market, there are struggles related to funding. Access to loans needed for growth is often limited, and the current venture capital climate is not necessarily the best. This is especially true if companies are considered socially disadvantaged businesses due to hardships, minority situations, and other obstacles. In an effort to even the playing field, the Small Business Administration (SBA) does have some targeted programs. And one of these programs under the Small Businesses Act is designed to help these specific entities. Known as the 8(a) program, businesses are granted preferred access to some federal contracting jobs. But given the recent ruling on Affirmative Action at universities, it’s unclear how viable this program will be moving forward.
(Startup seeds are being planted on tribal land–read all about it in this Bold story.)
Recent court rulings have placed pressure on the 8(a) program, citing its criteria for identifying socially disadvantaged businesses are inadequate. Challenges were raised by majority-owned companies who felt they were being subject to unfair discrimination. As such, the SBA is having to revisit their processes and procedures in light of the current Affirmative Action environment. And for some firms, such as those owned by Native Americans and others, these decisions could set them back years in contract accessibility. Certainly, both sides have strong arguments when it comes to fair play and justice. But it remains unclear just how fair and just programs like the 8(a) program will eventually be. Thus far, it would seem the courts are leaning away from helping socially disadvantaged businesses unless more robust criteria are used.
The Recent Case Against the SBA
The current issues facing the SBA relate to a case at the U.S. District Court level. Known by Ultima Servs. Corp. v. U.S. Department of Agriculture, the case challenged the SBA’s current determinations under the 8(a) program. Ultima filed suit against the Department of Agriculture after losing its federal contract in 2020. This occurred when the SBA moved the contract under its 8(a) program, which preferentially awards contracts to socially disadvantaged businesses. And according to the courts, the SBA routinely defined socially disadvantaged businesses based on minority ownership. Given that Ultima was owned by a White woman, it no longer qualified for the contract. And this prompted the lawsuit being filed.
The motivations for the SBA’s 8(a) program is to facilitate greater diversity, equity, and inclusion in its contracting process. It is well recognized that minority-owned businesses often face greater barriers in accessing federal contracts. Therefore, the SBA in pursuit of its goals didn’t routinely prove existing hardships but instead assumed them based on race. At least this was the court’s opinion, which ruled on the case on 7/23/23. Basing its conclusions of recent Supreme Court Affirmative Action decisions, the court stated similar criteria applies to the SBA program. Now, additional motions have been filed seeking to terminate existing and pending federal contracts that have been recently awarded under current SBA practices.
Identifying Socially Disadvantaged Businesses
The recent Supreme Court ruling on Affirmative Action has definitely muddied the waters when it comes to determining privilege and disadvantage. One thing, however, is clear in that race and heritage alone cannot be used in awarding opportunities. The court has indicated that such practices failed to honor Constitutional rights, including due process and equal rights protections. Additional criteria must be used, and merit-based determinations must be included. While these issues may not apply to private business practices, they certainly do when it comes to government activities. Naturally, the SBA must abide by this ruling, and adopt a different approach in administering its 8(a) program.
For small businesses and entrepreneurs that are not racial minority-owned, the SBA does require additional information. For these applicants under the 8(a) program, socially disadvantaged businesses must provide narratives to support this claim. This has not been previously required by tribally-owned business or by those involving other minority groups. But based on the court ruling, this is expected to change. The key question now is whether a narrative supporting socially disadvantaged status will be enough. It may be that the court requires much more than this to justify the spirit of recent Affirmative Action rulings. At the present time, the SBA is conferring with the Justice Department to evaluate this further. Naturally, this has many minority-owned firms concerned regarding future opportunities to compete.
The Potential Impact on Small Businesses
When it comes to socially disadvantaged businesses, the SBA has provided increasing support in recent years. Through the 8(a) program, there has been a progressively higher number of federal contracts awarded to such firms. To highlight this fact, tribal businesses failed to receive any such contracts in 1997. However, by 2021, tribal businesses were able to access 2.5% of those available. This equated to $10.7 billion in revenues, which is a significant boost for such minority enterprises. This same year, about 10% of SBA-approved federal contracts went to socially disadvantaged businesses. Its goal had been to push this to 15% by 2025 with its current 8(a) program procedures. But based on court rulings related to Affirmative Action now, the SBA may well fall short of this target.
Based on these developments, it’s evident that a great deal of ambiguity surrounds Affirmative Action-related issues. For the SBA, more will have to be done in making determinations of socially disadvantaged businesses for its contracts. But how extensive such a process must be is not clear, and there’s no guarantee that the issue won’t end up back in court. The pursuit of diversity, equity, and inclusion is certainly honorable, and there’s no question that the playing field isn’t even. But the process has to be fair and just for all, not only minority businesses but majority ones as well. Merit has to be considered, and discriminations must be avoided. The key will be defining how to support socially disadvantaged businesses without undermining others’ opportunities. And of course, it will similarly be important to get the courts to agree along the way.
What is the Broadband Equity Access Deployment (BEADs) Program? Find out in this Bold explainer!
