Decent proposals

Entrepreneur, May, 1999 by Stephen Barlas

The latest on SBIC investments, independent contractors and contract bundling

Entrepreneurs should keep their eyes on three issues making headlines in Washington.

Congress is expected to pass a bill that gives new flexibility to Small Business Investment Companies (SBICs), which combine their funds with federally backed loans to make investments in and loans to small businesses.

The bill (H.R. 68) makes several changes to the current law. The House approved H.R. 68 on February 2, and the Senate will probably have passed it by the time you read this.

Two provisions are worth highlighting. Currently, SBICs that agree to buy stock in a small business can't fork over the capital until the fourth quarter of their fiscal year, which is when they receive 50 percent of their funds - known as leverage - from the SBA. H.R. 68 allows the SBA to distribute leverage evenly throughout the year so small businesses can receive the SBIC investment more promptly. A second provision lets an SBIC reduce the interest rate on a loan made to a company in exchange for stock options in that company.

Another small-business bill may encounter some difficulties. Sen. Christopher Bond (R-MO) introduced a bill (S.344) aimed at forcing the IRS to be more reasonable in how it defines independent contractors. The bill sets up two alternatives to the IRS' current 20-factor test, which makes it difficult to legally claim a contractor is independent (and not an employee). Either of the proposed alternatives could be used to prove that someone is an independent contractor.

Regarding the SBA reauthorization bill that passed in 1997, the SBA is currently writing rules to define the bill's anti-contract-bundling language. The proposed rules would be used by the Defense Department, NASA and other big-project agencies to determine when and to what extent they must break up big contracts so small businesses can have a chance to win all or part of them during competitive bidding. The rules will also dictate when the SBA can protest new contract awards where small-business bidders have been unfairly ignored.

Felix Martinez of the American Consulting Engineers Council was a staffer on the House Small Business Committee during hearings on the: SBA reauthorization. He says much of what's in the proposed rules is positive, but is concerned the SBA will use the rules to break up large contracts that were consolidated years ago with the intention of including small businesses. "They need to pick and choose their fights," he says. "They should go after contracts that are being unfairly bundled for the first time right now."

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Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.