Many small businesses depend on federal government programs to create a thriving business. But many programs are only for “small” businesses, which may seem like a vague requirement. However, there’s a clear-cut way to determine whether or not your business is small.
Size standards determine whether or not your business qualifies for certain federal programs, such as federal contracts, financial assistance and innovation projects. The size standards are set by the Small Business Administration (SBA), which also has the authority to change the established standards. Here’s how the the SBA determines if you are a small business.
How to Determine if You’re ‘Small’
The first question you should ask yourself to determine if you are small is whether or not you’re a “business concern.” To be a business concern, you must:
- Be for-profit;
- Have a place of business in the U.S.;
- Either primarily operate in the U.S. or make a significant contribution to the U.S. economy (pay U.S. taxes, employ U.S. workers, etc.).
If your business does not meet the requirements of a business concern — for example, if your business is a non-profit — it does not qualify as a small business under the standards of the SBA. This does not disqualify you for contracts and grants, but it does disqualify you from competing with business concerns for the same government contracts.
Second, your business can’t be larger than the maximum requirements set for your industry — determined by your business’s NAICS code — as set by the SBA. These size requirements will either be in the form of average annual receipts or the average number of employees at your company. If you don’t know what your business’s NAICS code is, you can check it here, then check the SBA size standards for your industry.
How to Calculate Average Annual Receipts & Number of Employees
If the size standard for your company is listed in average annual receipts and you think you might be close to the cutoff, you’ll need to calculate your average annual receipts for the past three years. You can do so using this formula:
Receipts = Total Income (or Gross Income for sole props) + Cost of Goods Sold
If you’re already operating your business, you’ve previously calculated these numbers for your tax forms sent to the IRS.
If the size standard for your industry is classified by the number of employees at your company, you’ll simply calculate this by taking the average number of employees for each pay period during the past 12 months. The number of employees at your firm includes full- and part-time employees, as well as temporary employees.
Here are two widely-used size standards:
- For most mining and manufacturing: 500 employees
- For many non-manufacturing companies: $7.5 million
How Affiliation Can Impact Your Eligibility
Who or what your business is affiliated with can affect its eligibility for status as a small business. Affiliation occurs when one individual or another business has the power to control your business. For example, the affiliation of an investor or venture capital company may affect a small business’s eligibility for status as a small business, or a large contractor working with a small subcontractor may be considered an affiliate of the small subcontracting businesses.
The power to control a business can also occur when an individual controls a relatively large portion of the company. Minority owners can be considered affiliates of a business if they don’t control a relatively large portion of the business but own about the same amount of stock as other minority owners. An owner can also have an effect on a business’s ability to qualify as small for some federal programs. For example, an affiliated individual’s net worth can affect whether a business is considered small under the SBA’s financial assistance programs.
For more information on how affiliates affect your business, check the SBA’s Guide to Affiliation rules.
The Loans You Can Get as a ‘Small’ Business
If your business meets the size standards for your industry, you can qualify for loan assistance programs through the SBA, including:
- The 7(a) program
- The CDC/504 program
- The Small Business Investment Company (SBIC) program
For the 7(a) and 504 programs, an alternate requirement also applies here, which is that your business must not exceed a total worth and net income of $15 million and $5 million, respectively. Because this is an alternate requirement, your business must not exceed both of these requirements.
Keep in mind that size requirements are just one piece of the puzzle to qualify for SBA loans. You must have a FICO SBSS score in order to access almost all SBA-backed loans, which requires establishing business credit. (You can see where your business credit scores stand for free at Nav.)
More Perks of Being ‘Small’
In addition to financial assistance programs through the SBA, size standards are used to qualify businesses for many federal development programs and contracts, including:
- The SBA 8(a) program, a program for economically disadvantaged businesses to gain a foothold in government contracting.
- Women-Owned Small Businesses (WOSB), Economically Disadvantaged Women-Owned Businesses (EDWOB), and Historically Underutilized Business Zones (HUBZone) programs, which help underserved communities gain access to federal business opportunities.
- Service Disabled Veteran-Owned Small Businesses (SDVOSB)
- Small Business Innovation Research (SBIR) Program, which allows businesses to submit innovation ideas in research that help solve problems of the U.S. government
- Federal small business contracts available via FedBizOpps.gov, which is a database for businesses to search for contracts with the federal government. To apply for federal contracts, businesses must self-certify when registering their business at SAM.gov that they do indeed meet the requirements.
Some individual contracts may have additional size standards for each industry that businesses must meet. If you find that you’re on the cusp of qualifying as a small business for program with the federal government, but exceed this or that specification in an amount you feel is negligible, you can file a written appeal of size determination to the SBA.
How has being “small” helped your business? Share with us in the comments.