A Small Disadvantaged Business (SDB) is a small business owned by at least 51 percent by one or more individuals who are economically and socially disadvantaged. Being SDB makes a company eligible for contracting benefit programs and bidding that involves federal procurement. A publically-owned business can also be an SDB if one or more individuals unconditionally own at least 51 percent of its stock and control public company’s management and daily business. Now, what does being socially and economically disadvantaged mean? According to the Small Business Administration (SBA), those groups that have been historically subjected to “racial or ethnic prejudice or cultural bias” within the larger American culture are socially disadvantaged.
Some groups coming in this category are Hispanic Americans, Asian Pacific Americans, African Americans, Subcontinent Asian Americans and Native Americans. Members of other groups can also come in the same category if they satisfactorily convince that they meet the necessary and established criteria.
On the other hand, economically disadvantaged individuals and groups have limited access to financial opportunities that have hampered their ability to compete in the free enterprise system, unlike people in similar businesses who are not socially disadvantaged. To get certified as SDB, a company, either private or public, must be qualified and certified by the SBA. In addition to SBA, companies have been able to self-certify since October 2008. However, to get the status of SDB, a company should carefully read the definition of an SDB and prepare a defense.
Small Business Certification:
Your business must obtain the proper certification from the federal government before and soon as you start a business with the government. The Federal government has set aside several contract bidding opportunities exclusively for small businesses. If you want to compete for these contract bidding, you must have all the necessary conditions and meet a small business definition.
As it has already been said, being an SDB provides you with some opportunities provided by the federal government. These opportunities are as following:
Opportunities for Disadvantaged Business:
The SBA has placed several programs to help level the playing fields for disadvantaged businesses. Suppose you qualify as socially and economically disadvantaged, are the controller or primary owner of a small business, a service-disabled veteran or a woman. In that case, you can participate and get benefits from one of these programs placed by the federal government. To get benefits from these programs, you must be the owner of at least 51 percent of your business and control your company’s management. In the case of a business partnership, the same rule of controlling at least 51 percent of stock applies if you want to get benefit from these programs.
In addition to this, an SBA program called HUBZone helps small businesses in rural and urban areas gain preferential access to these contract biddings if they are located in areas termed as Historically Underutilized Business Zones. To apply for these programs, you must get certified. Each of these programs comes with significant opportunities for disadvantaged businesses. The federal government has allocated up to 16 percent of all federal contract dollars for these groups. Now we will explain opportunities and specific programs to different small disadvantaged businesses.
1: Historically Underutilized Business Zone:
Providing access to more federal contracting opportunities to small disadvantaged businesses located in the Historically Underutilized Business Zone is the point of the HUBZone program. Through this, it encourages development in these areas. This program was established in 1997, and SBA runs this. This program was meant to provide preferential treatment in awarding contracts to encourage economic development. These benefits include a 10-percent price evaluation preference in open contract competitions, competitive and sole-source contracting and subcontracting opportunities. Awarding three percent of all the federal prime contract dollars to HUBZone-certified small businesses is the federal government’s goal.
2: The 8(a) Business Development Program:
Small businesses that are owned and run economically and socially disadvantaged entrepreneurs come under the domain of the SBA’s 8(a) Business Development Program. The federal government is also planning to have at least five percent of a government contract in this program. It was established in 2008 to help these business owners gain access to the economic mainstream of American society. But it is important to note that the designation “socially and economically disadvantaged” does not solely apply to minorities, as is the case more often. For instance, you can be socially disadvantaged by your gender, race and disability. In addition to this, many states and cities have minority-oriented and minority-owned business programs. These are referred to as Minority Business Enterprise (MBE) programs.
Here emerges another question: What are the ways a small business is at a disadvantage. The later section will answer this question. Small businesses are at a distinct disadvantage in many respects as compared to larger businesses. That is why the government has placed some preferential programs for them, which are considered important. Here is a list of five areas where being a large business is an advantage.
- Small businesses cannot issue new stocks to raise capital or sell bonds. Rather they have to rely on loans.
- Economies of scale benefit larger companies. On the other hand, small businesses have to bear the higher production cost. Volume is another element helping large corporations in purchasing.
- Perks offered by small businesses to their employees are less than those offered by large corporations.
- Having a brand name helps larger corporations and these corporations stay above their smaller rivals.
• Raising Capital:
Businesses need capital at some point if they want to expand their business operations. For example, if a large corporation builds a new factory and plans to hire new employees, it can sell bonds and issue stocks to the public to get capital. On the other hand, smaller organizations and businesses don’t have that option. That is why small businesses have to rely on loans to get capital. The most obvious way of getting a loan is by approaching a bank or other lenders. One of the goals of the SBA is to encourage banks to expand loans to small businesses by guaranteeing the value of loans made to these businesses by banks.
Simply put, SBA does not extend loans to small businesses, but it collaborates with banks and lenders and reduces their risk. But there are some loans guaranteed by SBA that restrict how a business owner should use the fund. Moreover, small businesses, particularly small businesses, can also approach family and friends, venture capitalists, angel investors, or crowdfunding sites. Business owners can also get a small number of loans from a large group of people by going online.
Another reason that is beneficial to larger corporations is that they benefit from the economies of scale. Small businesses don’t have such benefits and have to bear the cost of production. Due to economies of scale, the cost of production is lower for large companies. For example, you want to build a table. You will spend a lot of money on buying raw materials, tools.
Moreover, a good deal of time will be needed in getting the pieces to fit just right. But if you want to build another table, that will be cheap because the tools are already there. Moreover, buying all the raw materials at once is cheaper and will depreciate the cost of the equipment. And the third is cheaper. This is how economies of scale work.
This benefit is for large companies that produce on a large scale that keep each piece’s total expense very low. On the other hand, small businesses cannot benefit from the economies of scale, and it is difficult and costly for them to mass-produce. Therefore, their production cost is higher than large corporations, and that cost has to bear by the customers.
• Purchasing Power:
Large corporations also keep costs lower by negotiating for lower prices. Take the example of a big automaker that has to buy steel to make trucks and cars. Since the carmaker is ordering material on a large scale, the supplier and vendor have an incentive to lower their price per ton. For smaller businesses, it becomes difficult to get this kind of deal due to their small-scale production and raw material need. Therefore, the supplier will not lower its price for a small volume of material. If a firm has to pay more for raw materials, it will get less profit on each car.
So, the lack of purchasing power affects the cost of business products, from telephone service to real estate. Health care costs are particularly plagued by this lack of purchasing power that represents one of the biggest expenditures for companies. That is the reason that Obamacare or Affordable Care Act (ACA) is trying to provide small businesses a more playing field by giving them more purchasing power in the insurance market.
• The Talent Gap:
The best workers and employees are indispensable for a business to excel, and almost every businessman is aware of this. Here, large businesses are also at comfort and ease for attracting high-level employees by offering them more incentives and perks. Thus, creates a talent gap between large corporations and small businesses. Some large companies offer their employees lucrative benefits such as expense account, employee stock ownership plans, fully-paid health care, dental care, vacation time and sick leave. But small businesses are at odds with these perks and privileges, but they try to make up for non-financial perks such as the ability to move up the ladder more quickly. Moreover, some small companies also offer benefits like telecommuting and flextime opportunities to attract employees who may join the large companies that offer good financial perks.
• Name Recognition:
Having a brand name also beneficial for large companies. The obvious and easiest way to faster your sale is that customer knows your brand before shopping something. Here comes the marketing muscle and advertising. In this case, large companies can invest more in advertising and make customers aware of their brand. But small businesses lack this. In addition to this, many large-scale companies are in the market for decades, like IBM, McDonald’s or Nike. That means they have years of experience and exposure in the market. So in name recognition as well, small businesses are at odd as compared to large companies.
In short, a small disadvantaged business is a small business owned by at least a person and group of socially and economically disadvantaged individuals according to the definition of SBA as a small business cannot compete with large corporations in the business. Hence, government, through different programs, tries to mainstream them by preferential treatment in contract bidding. These programs help excel small businesses in the market.