According to Investopedia, a Small Disadvantaged Business is "a small business owned and operated by socially or economically disadvantaged individuals."
This status is attributed to a business by the Small Business Administration, which ensures their growth and development.
Although being a SDB has its fair share of adversity, there are also plenty of opportunities for enterprises that qualify. To demonstrate this, we have compiled a guide on Small Disadvantaged businesses.
What is a Small Disadvantaged Business?
We know that SDBs are businesses owned by people at a social or economic disadvantage and that the Small business Administration is the one that grants this status to companies. But what does that mean in practical terms?
The status of a small disadvantaged business (also called 8(a) ) makes a company eligible for financial assistance, training, mentoring, and other forms of assistance by the SBA.
The term 8(a) is coined after section 8(a) of the United States' small business act, designed to help such businesses compete in the modern market.
What are the benefits of being a Small Disadvantaged Business?
We have already mentioned how members of the 8(a) program may receive financial aid in incentives to their business or services like training and mentoring when it comes to business administration. But the benefits offered by the program do not end there.
Members may also compete for select contracts explicitly designated for them and designed to level the market playing field.
There is also the possibility of forming a joint venture with already developed businesses and establish a "mentor-protégé" relationship. A company can also use this relationship to receive management or technical assistance.
Qualification Criteria for the 8(a) Program
So, what exactly is considered a "disadvantaged group"? What extent does a member of such a group need to be involved in the enterprise for it to be considered an SDB?
The Small Business Association considers several groups within Civil Society to be eligible for this program, including:
- Black Americans
- Hispanic Americans
- Native Americans
- Asian Pacific Americans
- Subcontinental Asian Americans
According to SBA's criteria, people within these groups must own at least 51 percent of the firm, along with its stock. Its daily operations must also be controlled by at least one person of these groups to qualify as a Small Disadvantaged Business.
Now that we know what a Small Disadvantaged Business is, it's time to ask ourselves one question: "why would I, or anyone want to become a part of this program?" There are quite a few advantages the project offers to a small business, among them being:
A Sole Sourcing contract is where a buyer sees only a specific provider to provide the contract conditions he is seeking and contacts them directly to fulfill the contract.
Sole sourcing represents about half of all SDBs annual sales, amounting to over 16 Billion Dollars. The Federal procurement officer contacts the SDB owner, and a contract is set before other companies even learn of the opportunity.
Having an SDB certification can significantly decrease competition for bidding on federal contracts. This limited competition is primarily due to the small number of companies that have successfully qualified for the program (around 6,500 to 10000 firms out of 45 million US-wide), thus giving SDBs a significant edge.
Relatively Large Contracts
Although you may not be doing crazy, global-scale contracts, being a part of the 8(a) program will give you access to deals that are relatively large from a small business point of view. This is primarily due to the permission SDBs have to start joint ventures with larger businesses, thus enabling them to participate in contracts that would be out of the league for small businesses.
The Small Business Administration tends to act as a liaison to help SDBs acquire federal contracts. This greatly diminishes the time between the 8a firm's start of operations and their first contract. One way this is done is that the SBA will send letters of introduction to the firm's target market to facilitate the initial agreement.
Disadvantages of the SDB Program
Although the advantages above are certainly very positive for Small Disadvantaged businesses, no company in the world does not run into adversity in one way or another. Therefore, It can only be expected that being an SDB comes with its share of disadvantages. A few of these disadvantages are listed below.
Oversight and Reporting
If accepted into the 8(a) program, a firm will be subject to yearly evaluations, which will judge it based on business planning that can be very expansive and time-consuming to meet. There is also the fact that changes done to the ownership and structure during the program can affect the SDB's eligibility.
The 8(a) program was designed specifically with small businesses in mind, and if during the program, if your business grows to the point where it no longer can be considered a small business, you may lose eligibility.
Applying for this program means making a nine-year commitment to run your business under the SBA's orientations and Guidelines. With such a long period of dedication from small business owners, many hesitate to try it due to this reason.
We have already covered the prerequisites that make a business eligible for the 8(a) program, things like the business being at least 51% owned by someone from a disadvantaged group. Yet, the SBA can draw out the application process to prove eligibility.
The Small Disadvantaged Business classification was created with the clear objective of creating a fairer and more inclusive market by offering people from disenfranchised groups some necessary aid to grow their small businesses.
Therefore, It would only make sense for you to consider applying for the program to grow your business.
Luckily, Small Business Mentor is here to provide you with proper guidance with this and a plethora of other matters concerning your business.