Small Business Administration

The Small Business Administration (SBA), which was created in 1953, is an independent federal agency charged with aiding, counseling, and protecting the interests of American small businesses. The agency maintains a wide range of programs designed to address various aspects of this mandate. These programs, each of which seeks to assist small business owners in one or more areas of their enterprise, are maintained in the following areas: lending and investment; surety bonds; international expansion and development; disaster assistance; federal procurement contracts; minority small business assistance; veterans' assistance; research and development; business and training; and business information and counseling. The SBA also serves as an advocate for American small businesses in government.

STRUCTURE OF THE SBA

Most SBA programs and services are implemented through Small Business Administration district offices. District offices are maintained in all 50 states, as well as Washington, D.C., and Puerto Rico (some larger states, such as California, New York, and Texas, have as many as half a dozen offices). Personnel in these offices work directly with small business owners and various cooperating institutions to implement SBA programs.

These field offices report to regional offices of the SBA. In addition to their supervisory responsibilities, the regional headquarters are charged with educating small business owners, lending institutions, and others on issues that affect them; fostering regional economic development; and providing the Office of Field Operations (OFO) with information on SBA programs and small business developments at the district level. OFO is responsible for all aspects of the SBA's field operations, including communications, policy formation, and general performance. It reports directly to the SBA's chief administrator.

Collateral offices maintained by the Small Business Administration include administration; comptroller; personnel; external affairs; marketing and customer service; public communications, congressional and legislative affairs; Hearings and Appeals; Inspector General; Office of Information Resources Management (OIRM); Equal Employment Opportunity and Civil Rights Compliance; and Office of General Counsel.

Finally, the SBA maintains several departments devoted to providing advocacy services on behalf of American small business owners. The Office of Interagency Affairs oversees enforcement of the Regulatory Flexibility Act, analyzes small business issues, develops governmental policy options, and prepares testimony for use before various legislative and regulatory bodies. The Office of Economic Research oversees the SBA's research contracting program, and compiles and interprets various economic data on small businesses. The Office of Information publishes books and economic reports on small business issues, and serves as a distributor of advocacy publications and other materials. Finally, the Office of Advocacy attempts to evaluate the effect of proposed legislation and other policy issues on small businesses. The chief counsel for advocacy acts as the primary spokesperson for America's small business community and represents its views before Congress, local governments, and other agencies. The Office of Advocacy also utilizes regional advocates who work directly with local communities and small businesses, gathering information on policies and regulations that are helping and hurting small businesses and the communities in which they operate.

SMALL BUSINESS ADMINISTRATION PROGRAMS

Lending Programs

The SBA provides a number of lending options to small business owners. The best known of these is the 7(a) Loan Guaranty, but there are many others that are widely used as well. In all of these cases, the loan is actually delivered through commercial lending institutions and other intermediaries. The SBA helps secure the loans, though, by consenting to cover the cost of the loan should the borrower be unable to pay. Lending institutions value this added protection very highly.

The 7(a) Loan Guaranty Program, which was authorized by the passage of the Small Business Act, is primarily designed to address the long-term funding needs of small businesses by guaranteeing loans to qualified enterprises. These loans can be used for all sorts of purposes, including inventory, working capital, equipment, and real estate. Maturities are up to 10 years for working capital and up to 25 years for fixed assets. The SBA can guarantee 80 percent of loans of $100,000 or less, and 75 percent of loans between $100,000 and $750,000. There are several other loan programs available through the 7(a) Loan Guaranty plan as well.

The Low Documentation Loan (LowDoc) program is a streamlined version of the 7(a) loan for businesses seeking less than $150,000. Limited to applicants with a strong credit history, LowDoc loans can be secured with a one-page application (in cases where the loan request is for $50,000 or less). The SBA has made a strong effort to improve response time under this plan, in large measure because it had long been criticized for the bureaucratic red tape associated with even the smallest of its loan programs.

The CAPLines program is an option designed to meet the short-term and cyclical working capital needs of small businesses. There are several different loan options available under this program, which replaced the SBA's earlier GreenLine program. Loans under CAPLines are generally limited to $750,000.

The SBAExpress program is shaped to increase the capital available to small businesses seeking loans up to $150,000; it is currently offered as a pilot program, with a limited number of participating lenders.

SBA MicroLoans, meanwhile, are short-term loans of up to $25,000. Disseminated through non-profit groups, MicroLoans are intended for the purchase of machinery and other equipment, office furniture, inventory, supplies, and working capital.

The SBA also offers several targeted lending programs for small businesses. These include the Defense Loan and Technical Assistance (DELTA) program, which provides financial assistance to defense-dependent small businesses impacted by defense cuts (maximum loan amounts under the DELTA plan through the 7(a) Program is $1.25 million, usable for working capital, acquisition of assets, raw materials or inventory, capital improvements, or refinancing of current debt); prequalification pilot loan programs for women and minorities; the Export Working Capital Program (EWCP), which guarantees loans for qualified small businesses engaged in export transactions; the International Trade Loan (ITL), which provides long-term financing assistance to small businesses engaged in international trade and/or hurt by imports; and the Pollution Control Program, which gives loan guarantees to eligible small businesses proposing to design and install pollution control facilities.

The SBA also maintains a loan program known as the 504 CDC (Certified Development Companies), which makes available up to $1 million to qualified applicants. Under this system, long-term, fixed-rate financing is made available to small businesses interested in expanding or modernizing their operations through the purchase of new machinery, equipment, and/ or real estate. DELTA loans are available through this program as well.

Another SBA loan program is the U.S. Community Adjustment and Investment Program (CAIP), created to help communities that suffered economic and workforce losses due to changing trade patterns following implementation of the North American Free Trade Agreement (NAFTA). According to the SBA, this program utilizes both the SBA 7(a) Program and the SBA 504 Program to "promote economic implementation of the adjustment [to NAFTA] by increasing the availability and flow of credit and [encourage] business development and expansion in impacted areas. Through the CAIP, credit is available to businesses in eligible communities to create new, sustainable jobs or to preserve existing jobs." Small companies interested in pursuing CAIP assistance should contact their local CDC for more information.

The Small Business Administration relies on lending institutions and other intermediaries (such as non-profit organizations, in the case of MicroLoans). But the SBA is careful about the banks and savings and loans companies with which it does business. The most reliable of these lending institutions are eventually designated as "preferred lenders." This status gives them increased powers of loan approval and processing (although the SBA still conducts a final review of loan applications). To become a preferred lender, an institution needs to have established a reputation for solid community lending (to small businesses and minority- and women-owned firms) and a strong history of being repaid by loan applicants.

Investment

The SBA also maintains investment programs for small businesses. The Main Street Investment Program, for example, is described by the SBA as "a public/private partnership between the SBA and state governments to make capital more available to lenders who, in turn, make loans to small businesses. Participating states invest tax revenues in community banks that agree to make LowDoc loans." Small Business Investment Companies (SBICs), meanwhile, are SBA-licensed investment firms who—armed with U.S. government-guaranteed debentures or participating securities—make investments and loans to small businesses. Indeed, SBICs exist for the express purpose of funding start-up companies. They operate under extremely stringent guidelines, however, and turn down many applicants. Similar to SBICs are Minority Enterprise Small Business Investment Companies (MESBICs), which provide funding to businesses owned or operated by minorities.

Surety Bonds

In recognition of the fact that contractors to construction projects must post surety bonds on federal construction projects valued at $25,000 or more, the SBA established a program wherein they guarantee bid, performance, and payment bonds for contracts up to $1.25 million for eligible small firms unable to secure surety bonds through commercial lenders. Under this program, bonds may be obtained either via prior approval, in which contractors apply through a surety bonding agent; or preferred sureties, authorized by the SBA to issue, monitor, and service bonds without prior SBA approval.

International Trade

The SBA's International Trade Loan Program is designed for small companies engaged or preparing to engage in international commerce. Under this program, the SBA guarantees up to $1.25 million for a combination of fixed asset financing and Export Working Capital Program (EWCP) assistance. The fixed-asset portion of the loan may not exceed $1 million, while the EWCP segment may not exceed $750,000. According to the SBA, the small business applicant must do the following in order to qualify: "establish that the loan will significantly expand or develop an export market, is currently adversely affected by import competition, will upgrade equipment or facilities to improve competitive position, or must be able to provide a business plan that reasonably projects export sales sufficient to cover the loan."

In addition to maintaining loan programs for small businesses engaged in international commerce, the Small Business Administration provides a number of other services to these enterprises. The Export Legal Assistance Network (ELAN), for instance, is the product of an agreement between the SBA, the Federal Bar Association, and the U.S. Department of Commerce. Under this program, trade attorneys provide free legal consultations to small business exporters.

The SBA also operates information centers called U.S. Export Assistance Centers (USEACs). As with ELAN, the USEACs are the product of an alliance between the SBA and other organizations (in USEACs' case, the Department of Commerce and the Export-Import Bank). These centers are designed to disseminate trade promotion and export financing information to small businesses engaged in international trade. In addition, the SBA maintains a computer database known as the Small Business Automated Trade Locator Assistance System (SBAtlas), which includes market data of interest to exporters.

Assistance Programs

The SBA makes available Physical Disaster Business Loans to businesses of any size that need to repair or replace business property to "pre-disaster" conditions. These loans, which can be used for equipment, fixtures, and inventory, are limited to $1.5 million and are not available to businesses who were insured for their losses. Economic Injury Disaster Loans (EIDLs), meanwhile, are targeted at businesses that have "sustained economic injury as a direct result of a disaster," said the SBA. "These working capital loans are made to help businesses pay ordinary and necessary operating expenses which would have been payable barring disaster." The maximum amount of an EIDL loan is $1.5 million, but small business experts note that businesses can receive no more than $1.5 million in combined EIDL and physical disaster business loans. An exception to this stipulation is made, however, for those places of business that qualify as major sources of employment. Under the SBA's Major Source of Employment (MSE) program, the $1.5 million loan limit is waived for those businesses that employ 250 or more people in an affected area.

Federal Procurement

The Small Business Administration maintains several programs designed to help small businesses secure government contracts. These include:

• Breakout Procurement Program—promotes the breakout of historically sole-source contracts for open competition with the aim of aiding small businesses and effecting government savings.
• Prime Contracting Program—designed to help small businesses interested in securing federal contracts; services include support for small business set-asides, counseling, identification of new small business sources, and "assessment of compliance with the Small Business Act through surveillance reviews."
• Subcontracting Program—designed to aid small businesses in their efforts to secure federal contracts as suppliers and subcontractors.
• Certificates of Competency—appeal process that can be used by small businesses that have been denied government contracts because of alleged lack of ability to fulfill job requirements.

The most recent program in this area introduced by the SBA is the HUBzone Empowerment Contracting Program. This initiative, unveiled in 1997, provides federal contracting opportunities for qualified small businesses located in economically distressed areas.

Minority Assistance

The SBA has several programs intended to provide support to small businesses owned and operated by minorities. Programs maintained by the SBA's Minority Enterprise Development office include 8(a) Small Disadvantaged Business Development, which arranges federal procurement opportunities for minority-and disadvantaged-owned firms, and initiatives which provide management and technical assistance to those firms. The SBA also operates an Office of Native American Affairs (ONAA), which works to provide Native American communities with business development and job creation opportunities.

Business Training and Counseling

SBA-sponsored training and counseling services are available through the following programs:

• Small Business Development Centers—provides management and technical assistance to both current and prospective small business owners through an alliance of educators, the private sector, and federal, state, and local governments. All areas of business are covered, from market research and accounting systems to inventory control and cost-benefit analysis.
• Business Information Centers (BICs)—specializes in providing technology information to small businesses. Subjects covered include advances in telecommunications, software, and computers.
• Service Corps of Retired Executives (SCORE)—matches retired business executives with small businesses seeking advice on business issues. SCORE includes more than 12,300 members in hundreds of chapters around the country.

Women's Business Ownership

SBA programs specifically directed at women small business owners include the Women's Demonstration Program, which provides women with training and advice on all aspects of business ownership and management, and the Women's Network for Entrepreneurial Training (WNET), wherein established women business owners serve as mentors to other women entrepreneurs.

Veterans' Affairs

The SBA maintains several programs intended to provide information and training to veterans. These include the VET (Veterans' Entrepreneurial Training) Program, the Transition Assistance Program (TAP), and "business opportunity conferences," which helps veteran-owned companies previously reliant on the defense industry to secure other clients.

Research and Development

The two principal programs administered by the SBA in this area are the Small Business Innovation Research (SBIR) Program and the Small Business Technology Transfer (STTR) Program. STTR is a program that seeks to form research and development partnerships between small firms and nonprofit research institutions. It provides up to $100,000 to companies for the first phase of research, though there are stipulations attached to that figure. SBIR, meanwhile, provides financial rewards to small businesses who propose innovative ideas to problems faced by participating federal agencies. Initially established in the early 1980s, as a result of the 1982 Small Business Innovation Development Act, SBIR has been warmly received by many small companies with expertise in science and high-technology areas.

One-Stop Capital Shop (OSCS)

The SBA expects to contribute to the Empowerment Zone/Enterprise Communities Program initiative headed by the Department of Housing and Urban Development and the Department of Agriculture through its "One-Stop Capital Shops." These centers, located in federally designated empowerment zones and enterprise communities, are expected to be headed up by local nonprofit organizations, but they are intended to include access to complete information on various SBA programs and offerings. "A One Stop Capital Shop is a partnership between SBA and a local community designed to offer small business assistance from an easy to access, retail location, all under one roof," explained the SBA. "Small business clients require a wide range of assistance, from the simple: accessing the Internet or gathering basic information on writing a business plan, to the complex: learning how to compete for a federal contract or applying for a city permit. Whether a small business needs information or has to complete a transaction, requires training or counseling, is applying for a loan or seeking a government contract, a One Stop Capital Shop is designed to make all those services available in one location…. No other SBA program or federal agency plays a more prominent role in generating economic revitalization in distressed communities than the One Stop Capital Shop Initiative."

Business Information Services

A comprehensive range of business development booklets is published by and made available from the SBA. A diverse range of topics are covered in these brochures; sample titles include Strategic Planning for Growing Businesses, Budgeting in a Small Service Firm, Inventory Management, and Evaluating Franchise Opportunities. SBA also maintains SBA Online, a computer-based electronic bulletin board of small business information, and a toll-free answer desk for small business owners with questions about aspects of their operation. The answer desk is open 24 hours a day, seven days a week, but counselors are only available Monday through Friday, 9 a.m. to 5 p.m. Eastern Time. The toll-free number is (800) 8-ASK-SBA. Finally, the Small Business Administration maintains a page on the World Wide Web at http://www.sba.gov.

see also 8(a) Program; Service Corp of Retired Executives (SCORE); Small Business Development Centers (SBDC); Small Business Innovation Research (SBIR); Small Business Technology Transfer (STTR)

BIBLIOGRAPHY

Barlas, Stephen. "Looking Ahead: Three SBA Programs Face Closer Scrutiny." Entrepreneur. January 1997.

Emerich, Amy., ed. Small Business Sourcebook. Gale Group, 1996.

Murphy, Richard McGill. "Now is the Time to Tear Down the SBA." FSB. June 2006.

U.S. Small Business Administration. SBA Profile: Who We Are and What We Do. 2000.

                                Hillstrom, Northern Lights

                                 updated by Magee, ECDI

Small Business Investment Companies (SBIC)

The Small Business Investment Company (SBIC) program was created in 1958 with the passage of the Small Business Investment Act of 1958. Licensed by the Small Business Administration (SBA), SBICs are privately organized and privately managed investment firms that provide venture capital to small independent businesses. These loans, which are available both to new and established businesses, consist of funds borrowed (at favorable rates) from the U.S. government or from the lending institutions' own capital stock. In essence, an SBIC uses its own capital, combined with funds borrowed from investors and supported by an SBA guarantee, to make investments in qualifying small businesses. The SBIC program is designed to assure that there are institutions within the marketplace able and willing to facilitate the capital needs of a vibrant small business community.

Two different kinds of Small Business Investment Companies operate in the United States. In addition to regular SBICs, investment firms known as Specialized Small Business Investment Companies (SSBICs) also exist; this latter type of firm emphasizes service to entrepreneurs who "have been denied the opportunity to own and operate a business because of social or economic disadvantage," according to the SBA. Formerly known as Minority Enterprise Small Business Investment Companies (MESBICs), SSBICs are now officially called Section 301(d) SBICs. However, since the differences between SSBICs and regular SBICs are minor they are generally lumped together under the SBIC heading.

THE SBIC ORGANIZATION

Ownership of SBICs generally takes two different forms. The majority of SBICs are relatively small, privately owned and operated firms, but many others are firms owned by commercial banks or insurance companies. For banks, establishment of an SBIC subsidiary is often an attractive proposition, because it enables them to make small business investments that would otherwise be closed to them because of U.S. banking laws and requirements. United States law places few restrictions on SBIC ownership. As the SBA itself said, "almost any person or organization with a minimum initial private capitalization of $5 million and an SBA-approved full time manager who will be in charge of the licensee's operations and who is able to serve the licensee's small business concerns, may be approved for ownership." Indeed, the SBA's interest in encouraging SBICs is evident in the relatively hands-off regulatory environment that they have established for such enterprises. Those regulations that the SBA does enforce are concerned with ensuring the continued financial and ethical health of the SBIC program.

SBICs, then, range from limited partnerships to subsidiaries of multinational corporations. Whatever their ownership situation, however, their ultimate goal is to realize a profit from their various business transactions. Some SBICs make most of their revenue from straight debt financing, with their profit coming from the differential between the cost of borrowing from the SBA and the interest rate they charge the small business bar-rower. Other SBICs take a more aggressive tack in seeking profits by making equity-participation loans.

According to the SBA, prospective SBICs (and SSBICs) must have a minimum private capital investment of $5 million to form (the minimum requirement for those firms wishing to utilize participating securities is $10 million). The amount of private capital that an SBIC has at its disposal is important, for the SBA limits its loan guarantees to SBICs to 300 percent of its private capital. The SBA notes, however, that an SBIC "with at least 50 percent of its 'total funds available for investment' invested or committed in 'venture capital' may receive an additional tier of leverage per dollar of private capital for total leverage of 400 percent of private capital. However, in no event may any SBIC or SSBIC draw down leverage in excess of $90 million." An SBIC that engages in leveraging is in essence borrowing additional investment funds from the U.S. Treasury. Only those SBICs that have invested the bulk of its initial private capital and are in full compliance with state and federal regulations are eligible to do this.

Small Business Investment Companies have several different options to choose from in providing financing to small businesses. Most SBICs provide long-term loans to qualified small businesses that need funding for needs that range from expansion of existing facilities to modernization of operations. Sometimes this loan will take the form of equity or debt securities.

OPERATING RESTRICTIONS FOR SBICS

While the SBA provides SBICs with considerable freedom to operate, they do require that these organizations adhere to certain rules. For example, SBICs are not permitted to invest in the following entities: companies with less than one-half of their assets and operations in the United States; unimproved real estate; finance and investment companies; or companies seeking to purchase or improve farmland, cemeteries, or certain other stipulated types of real estate (exceptions are made for sub-dividers and developers, title abstract companies, and real estate agents and brokers. Small Business Investment Companies also are forbidden from investing in other SBICs, or in business enterprises that do not fit federal definitions of a "small business."

The SBA also has established regulations in the following areas:

• Conflict of Interest—SBICs are not allowed to make business transactions with any of its associates, which are defined as officers, directors, employees, key "control persons," and certain shareholders.
• Control—the SBA has stipulated that no SBIC may exercise either direct or indirect control over the operations of any small business on a permanent basis. The SBA has, under some circumstances, permitted SBICs to assume temporary control of a business enterprise in order to protect its investment. Before doing so, however, the SBIC and the small business must submit a plan of divestiture for SBA approval.
• Overline Limitations—The SBA has established investment ceilings for both SBICs and SSBICs in their dealings with individual small businesses. SBICs are not allowed to invest more than 20 percent of its private capital with any one small business, while the limit for SSBICs is 30 percent. The SBA does, however, occasionally grant waivers to this rule.
• Cost of Money—The SBA regulates the cost of money on SBIC loans and debt securities issued by SBIC clients.
• Financing Proceeds—The SBA has established regulations designed to ensure that investment funds that are used to purchase securities go directly to the small business that has offered those securities.
• Length of Financing Agreements—SBA rules stipulate (in most cases) that SBIC loan agreements with small business enterprises be made for at least five years, and that the small business taking the loan be given adequate opportunity to fulfill its obligations ahead of schedule if it is able to do so. According to the SBA, loan and debt securities of less than five years' duration are permissible only on those occasions when they are necessary to protect existing financing agreements, are made in contemplation of long-term financing, or are made to finance a change in ownership.

BORROWING FROM AN SBIC

"As is true with venture capitalists in general, SBICs have divergent philosophies and operating policies," wrote Art DeThomas in Financing Your Small Business. "Some specialize in equity financing while others provide debt financing in several different forms. This latter group of SBICs is the richest source of debt financing for small businesses outside commercial banks." Small business owners, however, need to weigh several factors before making a loan arrangement with an SBIC.

Entrepreneurs and small business owners seeking financing from SBICs first need to determine how many options they have. Regional SBA offices maintain information on SBICs that operate in their areas, and while they do not provide guidance in directing businesses to particular SBICs, they can give information on the industries and types of investments in which area SBICs have historically shown interest. In addition, a free directory of SBICs is available through the National Association of SBICs.

As many experts note, small businesses should narrow their search for a suitable SBIC by eliminating those that do not provide the business's desired financing route or display adequate management experience in the industry in which the business is involved. Analysts also caution small business owners not to rush through the decision making process. Given the latitude that SBICs have in shaping their loan policies, individual SBICs often maintain dramatically varied lending policies. Entrepreneurs and small business owners should take the time to find the program that best meets their needs.

Business consultants also encourage prospective borrowers to negotiate the best possible loan agreement for themselves when talking with SBICs. "Aside from the specifics of SBIC lending that are mandated by existing law or regulation," noted DeThomas, "particulars such as interest rate, maturity, equity participation, and collateral requirements can be negotiated. In general, the more attractive your firm as a financing opportunity—that is, the stronger the business plan—the more negotiating leverage you possess."

BIBLIOGRAPHY

DeThomas, Art. Financing Your Small Business: Techniques for Planning, Acquiring & Managing Debt. Oasis Press, 1992.

"Senators Propose New SBA Program: Under the bill, the SBA would get a bigger chunk of an SBIC's profits. Private Equity Week. 7 November 2005.

U.S. Small Business Administration. SBA Profile: Who We Are and What We Do. 1996.

U.S. Small Business Administration. Small Business Innovation Companies Program. Available from http://www.sba.gov/INV/forentre.html. Retrieved on 5 June 2006.

                                  Hillstrom, Northern Lights

                                   updated by Magee, ECDI

Small Business Job Protection Act

The Small Business Job Protection Act (SBJPA), signed into law in 1996, contains a number of provisions that impact various aspects of small business operations, from retirement plans to changes in S Corporation structures. The small business community greeted many of the changes contained in SBJPA with considerable enthusiasm, since it was widely interpreted as an act that eliminated a number of unnecessarily burdensome provisions. The act touched on a wide variety of areas relevant to small businesses, especially in the area of pensions. Changes made by the law can be found in such areas as the definition of highly compensated employees, deferred compensation arrangements, family aggregation rules, minimum pension participation rules, "safe harbor" rules for qualified cash or deferred arrangements (CODAs), notice requirements, limits on matching contributions, distributions of excess contributions, elective deferrals that may be included as compensation, early participation nondiscrimination rules, plan distributions and QJSA waivers, employee leasing provisions, and modification of GATT interest and mortality rate rules. Small business consultants strongly advise business owners who wish to take full advantage of the myriad changes included within SBJPA to consult with a tax advisor or other accounting professional.

IMPACT ON SUBCHAPTER S CORPORATIONS

Some observers estimate that the Small Business Job Protection Act has directly impacted as many as two million small businesses currently structured as Subchapter S Corporations. For instance, the law allows S Corporations to increase its shareholders from 35 to 75, giving businesses heightened capacity to attract additional investors and capital. Another change that benefited small business owners concerned an expansion in the kinds of organizations that can be shareholders. Under the SBJPA, qualified pension plans became eligible to be shareholders in S Corporations after January 1998. Since many pension plans are willing to invest in promising young businesses, S Corporation owners have been able to turn to these entities as a source of significant capital.

The Small Business Job Protection Act also provided S Corporation owners with greater flexibility in structuring their businesses. Prior to the passage of the SBJPA, S corporations could not own more than 79 percent of another company, but with the new law, they may now own 100 percent of affiliated companies. Finally, business experts note that the SBJPA expands the number of allowable beneficiaries when an S Corporation puts together a small business trust.

CHANGES TO RETIREMENT PLANS

The SBJPA established a simplified retirement plan for small businesses that is known as the A SIMPLE retirement plan. Under these plans, which are designed for employers with 100 or fewer employees who do not maintain another employer-sponsored plan, employers and employees work together to help ensure that workers have adequate financial security when they reach retirement age. Under the law, employees may make elective pre-tax contributions of up to $6,000 annually, a total that has moved up at regular intervals to adjust for cost of living increases and in 2005 was set by the Internal Revenue Service (IRS) at $10,000. The employer is required to make matching contributions and do so every year. The SBJPA also requires that businesses contribute at least 1 percent of all employees' compensation or be subject to significant penalties.

The law also impacts other elements of pension plans. For example, for the years 1997, 1998, and 1999, the 15 percent excise tax on excess distributions from pension plans was suspended. Moreover, the act introduced safe-harbor formulas for 401(k) salary deferral and matching contributions that eliminated requirements that employers conduct annual nondiscrimination testing. "Under the 1996 act, small employers can adopt matching 401(k) plans without concern about whether non-HCEs [highly compensated employees] elect to participate," wrote Michael Collins and Charles Sherman Jr. in Journal of Accountancy. "Depending on how attractive non-HCEs find the safe-harbor matching formula, the use of the safe harbors may reduce substantially the employer contributions businesses must make on behalf of these employees…. The safe-harbor formulas provide a way for employers to avoid nondiscrimination testing by adopting a plan with a relatively generous employer match—one that includes a contribution of at least 4 percent of pay on behalf of all eligible employees (depending on employee contributions). Safe-harbor matching contributions must be 100 percent vested at all times. Such contributions generally may not be distributed to employees until the earlier of when they terminate employment or reach age 59 1/2." In addition, under the SBJPA, distributions from a qualified plan must begin by April of the calendar year following the later of: 1) the calendar year in which the employee reaches 70 1/2 years of age, or 2) the calendar year in which the worker retires.

BIBLIOGRAPHY

Day, Sally E. "ESBTs [electing small business trusts]: Perhaps More Advantages than Disadvantages." The Tax Adviser. September 2005.

Mulleneaux, Natasha M. "Retirement Plan Reform: The Aftermath of the Small Business Job Protection Act of 1996." Taxes: The Tax Magazine. August 1997.

Schneider, Mark N., and Marilyn C. Doolittle. "Small Business Job Protection Act Adds Simplicity (and Complexity)." The Tax Advisor. June 1997.

Sharp, Joel, Jr., and Hewitt D. Shaw Jr. "Subchapter S Reform: The Small Business Job Protection Act of 1996." Journal of Corporate Taxation. Spring 1997.

Sherman, Jr., Charles W., and Michael J. Collins. "The Safe-Harbor Solution." Journal of Accountancy. July 1999.

U.S. Department of Labor. Employment and Training Administration. Wyrsch, Mary Anne. "The Small Business Job Protection Act of 1996 and the Health Coverage Availability and Affordability Act of 1996." Available from http://workforcesecurity.doleta.gov/dmstree/uipl/uipl96/uipl_3696.htm. Retrieived on 5 June 2006.

                               Hillstrom, Northern Lights

                                updated by Magee, ECDI

Small Business Technology Transfer (STTR) Program

The Small Business Technology Transfer (STTR) Program is an initiative, coordinated and overseen by the Small Business Administration (SBA), to provide small businesses with greater access to funding in the federal innovation research and development arena. "Central to the program," notes the SBA, "is expansion of the public-private sector partnership to include the joint venture opportunities for small business and the nation's premier nonprofit research institutions. STTR's most important role is to foster the innovation necessary to meet the nation's scientific and technological challenges in the 21st century."

STTR is a parallel program to the Small Business Innovation Research (SBIR) Program, and was created by Congress when it reauthorized SBIR in 1992. The STTR program is a cooperative research partnership between small business concerns and research institutions. It differs from SBIR in two ways. First, it places a greater emphasis on the potential for commercial success. This has spurred participating agencies to be more stringent in their evaluations of applicants. Secondly, it requires that universities, federal laboratories, or nonprofit research centers team with businesses to get product into the marketplace. These research partnerships between small businesses and nonprofit institutions enable participants to combine entrepreneurial initiative and creativity with the expertise, equipment, and other assets of nonprofit research laboratories.

The SBA summarizes the program's development and rapid growth this way. "The STTR Pilot program began making awards in FY 1994. In that year, 198 awards were issued for approximately $19 million to small high technology businesses that collaborated with nonprofit research institutions to undertake R & D projects. In FY 2004, Federal participating agencies awarded 614 Phase I awards and 195 Phase II awards totaling just over $198 million dollars."

STTR QUALIFICATIONS

In order to be considered for the STTR program, interested small businesses must meet several criteria. For instance, they must be American-owned and independently operated for-profit enterprises. In addition, the size of the company may not exceed 500 employees. There is no workforce size limit for participating nonprofit research institutions, but they must also meet certain parameters of the program. They must be principally located in the United States, and they must meet one of the following three definitions: nonprofit college or university, domestic nonprofit research organization, or federally funded research and development center.

Five federal departments and agencies—the departments of Defense, Energy, and Health and Human Services, along with the National Science Foundation and the National Aeronautics and Space Administration—are required by STTR rules to reserve a portion of their research and development funds for the program. As the distributors of STTR funding, they also designate those subjects suitable for additional R&D and determine whether to accept or reject STTR proposals.

These agencies make STTR awards based on the following factors: qualifications of the nonprofit research institution and its small business partner; degree of innovation; and future market potential. Small businesses that secure STTR funding are then routed through a three-phase program.

Phase One: Startup. In this initial stage, awards of up to $100,000 are given to pay for approximately one year's worth of study and research into the scientific, technical, and commercial feasibility of an idea or technology.

Phase Two: Development. These awards, available to Phase One participants, reach up to $500,000 for two years. During this period, business/research partnerships engage in research and development work with an eye toward commercial potential.

Phase Three: Introduction to Market. During this phase, the completed project is introduced into the commercial marketplace to succeed or fail. No STTR funds support this phase. Instead, participants must secure funding from private parties or other federal agencies that do not allocate STTR monies.

For more information on the STTR program, contact the Small Business Administration's Office of Technology in Washington, DC, or visit the SBA's Web site at www.sba.gov.

see also Innovation; Research and Development; Small Business Administration

BIBLIOGRAPHY

U.S. Small Business Administration. Office of Technology. "What We Do." Available from http://www.sba.gov/sbir/indexwhatwedo.html. Retrieved on 2 June 2006.

                                  Hillstrom, Northern Lights

                                   updated by Magee, ECDI

Small Business Innovation Research (SBIR) Program

The Small Business Innovation Research Program (SBIR) is the federal government's most important research and development funding program for small businesses. It was established by the passage of the Small Business Innovation Development Act of 1982. SBIR, at the time of its passage, required by law that any federal government agency with an extramural research and development budget of more than $100 million set aside 1.25 percent of those funds for the development of high tech small businesses. When the original law expired after ten years, Congress reauthorized SBIR and increased the agencies' contributions to 2.5 percent in 1992. By the latter part of the 1990s, total SBIR funding had reached some $1.2 billion. In December 2000 the program was reauthorized—with $1.5 billion in annual funding—for another seven years.

The Small Business Administration (SBA) serves as the coordinating agency for the SBIR program. It directs implementation of the program among participating agencies, reviews their progress, and reports annually to Congress on the status of the program. The SBA is also the information link to the program, collecting solicitation information from participating agencies and publishing it in quarterly Pre-Solicitation Announcements (PSA). These announcements are the single source for the topics and anticipated release and closing dates for each federal agency's solicitations.

By 2006, 11 federal agencies were participating in SBIR, bestowing research and development funds to small businesses in an array of industries. Participating agencies include the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, and Transportation, as well as the Environmental Protection Agency, the National Aeronautics and Space Administration and the National Science Foundation. According to Science magazine, 96 percent of the total SBIR budget from all agencies comes from the Departments of Defense and Energy, the National Institutes of Health, National Aeronautics and Space Administration, and the National Science Foundation.

These agencies set aside seed funds to help small businesses develop innovative high-tech ideas whose commercial appeal may by some time in coming. Each year the agencies release for consideration more than 3,000 technology topics under which businesses may apply. The topics speak to specific program problems or needs and may be found in the quarterly Pre-Solicitation Announcement (PSA), which is only provided online.

SBIR ELIGIBILITY AND FRAMEWORK

To be eligible for SBIR funding, a small business concern must be American-owned, independently operated, for-profit, and employ fewer than 500 people. Nonprofit organizations are not eligible for SBIR awards.

The SBIR program comprises three phases. This approach allows the government agency to invest a small amount in the beginning and then increase their financial support later should the idea show promise. Once the project nears completion, funding drops off and the business must solicit capital from other sources.

Phase One—The Concept Stage. In this stage, individual awards of up to $100,000 are distributed to enable businesses to conduct approximately 6 months of preliminary investigations into the feasibility of their proposed project. At this point, business owners must have a well-formed idea for an innovative product and a specific plan for how to transform it into a commercially viable form.

Phase Two—The Prototype Development Phase. This phase, for which only Phase One entrepreneurs are eligible, provides additional monies (up to $750,000 over 24 months) to be used toward developing a prototype. From here, determinations are made about whether the product is a success or a failure and whether or not it is commercially viable. About 40 percent of Phase One ideas reach this second stage.

Phase Three—The Commercialization Stage. In this stage, states the SBA, "Phase Two innovation moves from the laboratory into the marketplace." No SBIR funds are used in this stage. Instead, funding must be secured from the private sector or other non-SBIR federal agency funding.

For more information on the SBIR program, contact the Small Business Administration's Office of Technology at 409 Third Street SW, Washington, DC 20416, (202) 205-6450. The SBA's Web site with information about the SBIR program is http://www.sba.gov/sbir/indexsbir-sttr.html.

BIBLIOGRAPHY

Barlas, Stephen. "Teaming Up: Universities and Businesses Come Together in a Pilot Program to Fund Innovation." Entrepreneur. August 1996.

Giannone, Michael A. "A Wealth of New Ideas." Environmental Technology. November-December 1999.

Gillis, Tom S. Guts & Borrowed Money: Straight Talk for Starting & Growing Your Small Business. Bard Press, 1997.

"SBIR project to develop novel electrode fabrication methods for thermal batteries." Advanced Manufacturing Technology. 15 January 2006.

U.S. Small Business Administration. "Technology SBRI/STTR." Available from http://www.sba.gov/sbir/indexsbir-sttr.html. Retrieved on 5 June 2006.

Wallsten, Scott J. "The Effects of Government-Industry R&D Programs on Private R&D: The Case of the Small Business Innovation Research Program." RAND Journal of Economics. Spring 2000.

                              Hillstrom, Northern Lights

                              updated by Magee, ECDI