Tuesday, 16 July 2019

How to Determine If Your Business Is a ‘Small Business’

How to Determine If Your Business Is a ‘Small Business’
10 Jul
11:09

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To be considered for loans and other assistance from the U.S. Small Business Administration, your company would need to meet the SBA’s definition of a small business.Certain government contracts and loan programs from the SBA are reserved for small businesses. To ensure the right companies receive these opportunities, including the relatively low interest rates that come with its loan programs, the SBA enforces eligibility requirements.

The SBA’s size standard is based on employee count and average annual receipts. The current averaging period is three years, although the SBA recently proposed a rule change that would allow businesses to average revenues from the past five years. The SBA’s size standard indicates the largest size that a business could be to remain eligible for SBA loans and federal contracting programs.

“What they have is conditions on how much a business can make as far as revenue in order to qualify for an SBA-guaranteed loan,” said Kyle Bayliss, regional director of the Maryland Small Business Development Center. Across the country, SBDCs assist business owners through a partnership with the SBA.

Continue reading to find out whether your business is a small business according to SBA guidelines, and what that means for your company.

The SBA’s definition of a small business

To be classified as a small business, your company would need to meet or fall below the SBA’s maximum annual revenue or employee count. The SBA sets specific standards for individual industries, so the exact requirements would depend on the type of business you run.

The SBA outlines standards for each industry listed in the North American Industry Classification System, or NAICS. The SBA provides a lengthy table describing employee and revenue limits for each industry, organized by NAICS code. You can find the table here.

Revenue limits range from $750,000 to $38.5 million, depending on industry, and employee requirements span 100 to 1,5000 employees. As long your business falls below its designated revenue or employee threshold, it could be considered a small business in the eyes of the SBA.

All workers, including those employed on a full-time, part-time and temporary basis, contribute to your overall employee count. If you acquired another business, employees from that business would also contribute to your total. The SBA takes an employee count on a 12-month basis, or counts employees for each pay period if you have not yet been in business for a full year.

The SBA’s definition of a small business incorporates companies that are far larger than the average small business seeking help from the Maryland SBDC, Bayliss said. An SBA small business may be larger than most would think. Businesses that support oil and gas operations, for instance, can have annual revenue up to $38.5 million.

Furthermore, the SBA requires that small businesses also meet the following requirements to be eligible for funding:

  • For-profit, officially registered and operating legally
  • Physically located in the U.S. and operates in the U.S. or its territories
  • Invested equity from the business owner
  • Sound business purpose
  • Ability to repay any debt

What it means to be a “small business”

Businesses that meet the SBA’s small business criteria can apply for SBA loan programs and federal contracting assistance. “The lending part of it is a really big help,” Bayliss said.

Your small business could be eligible for the following SBA-backed loans:

7(a) loan program: The SBA’s most popular program provides general-purpose loans for small business owners. You could borrow up to $5 million with repayment terms between seven and 25 years. Specialty loans within the 7(a) programs are available for certain needs like smaller loan amounts, export working capital or express time to funding.

CDC/504 loan program: Small businesses looking to acquire fixed assets, like buildings, land or machinery, can borrow funds to finance their purchase. There’s no set limit on loan size, though Certified Development Companies must administer all 504 loans. The SBA typically provides 40% of the total cost while a CDC contributes 50%. The business owner would need to provide the remaining 10%. The assets being purchased would serve as collateral on the loan.

Microloan program: For smaller funding needs, the SBA microloan program provides up to $50,000 to small businesses that have trouble qualifying for traditional business loans. Repayment terms for microloans typically max out at six years. SBA microloans are generally reserved for women, low-income, veteran and minority business owners.

SBA-designated small businesses can also apply for federal contracts through the following program:

8(a) Business Development program: The SBA limits competition for certain government contracts to small businesses that participate in the 8(a) program. The goal is to help disadvantaged businesses win valuable contracts. To be eligible for the program, an owner who is economically or socially disadvantaged must control at least 51% of the business. The owner must also have a personal net worth of $250,000 or less, $4 million or less in assets or $250,000 or less in average adjusted gross income for three years.

Additionally, business owners must show good character and potential to successfully perform. If approved for the 8(a) program, you could compete with similar businesses for sole-source contracts. You could also receive assistance such as business training, counseling or marketing help from a mentor who is also participating in the program.

The SBA 8(a) program provides a leg up for small businesses that may not otherwise win big contracts, Bayliss said. Women and minority entrepreneurs particularly benefit from this program, he said.

“Actually doing government contracting, it’s really hard, especially for small businesses,” Bayliss said.

Other benefits of meeting the SBA’s size standard

SBA-approved small businesses could have access to additional assistance, most notably resources set aside for women and veteran entrepreneurs.

For instance, the SBA’s Women-Owned Small Businesses Federal Contracting program reserves federal contracts for qualified women-owned businesses. It’s like the 8(a) program, but specifically designed to give women entrepreneurs increased access to federal contracts.

Organizations such as the National Women’s Business Council and the Association of Women’s Business Centers also provides resources and opportunities for women-owned small businesses through partnerships with the SBA. To access resources for women-owned small businesses, you would need to receive certification from the SBA. You can apply for certification here.

Eligible veteran-owned small businesses could also access training programs and specialized loans through the SBA Office of Veterans Business Development. Programs like Boots to Business and the Veteran Federal Procurement Entrepreneurship Training Program teach veterans the skills to successfully run a small business.

The SBA also guarantees loans for veterans through the SBA Veterans Advantage program. Additionally, the Military Reservist Economic Injury Disaster Loan Program provides funding to businesses with employees who have been called to active duty.

Becoming certified for these programs could be a lengthy process. The SBA would ask you to submit information about your business, such as organizing documents, past financial statements and a business plan, as well as personal information like income statements and proof of citizenship.

As an SBA small business, you may be able to qualify for government-sponsored business grant programs as well. Both the Small Business Innovation Research Program and Small Business Technology Transfer Program are tied to the SBA, and grant recipients would likely need to meet SBA size standards.

The bottom line

The SBA provides countless resources to business owners across the country, but there’s a catch — you have to qualify as a small business according to the SBA’s standards.

Fortunately, these requirements are broad and take your specific industry into consideration. You would need to fall below the threshold of number of employees or annual revenue that the SBA sets for your industry. The limit on employees ranges from 100 to 1,500 workers, while revenue maximums range from $750,000 to $38.5 million.

If your business is within the SBA’s parameters, you could apply for a number of contracting and business loan programs. You could also receive additional resources set aside for underserved business owners, such as women and veteran entrepreneurs.

Your local small business development center could help you determine which programs your business may be eligible for and provide assistance with any applications. Be sure to calculate the correct size of your business before applying for SBA resources.

This article contains links to LendingTree, our parent company.

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Melissa Wylie

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