Small business owners who would like to get an SBA loan or to compete for federal government contracts set aside for small businesses must meet the U.S. Small Business Administration’s definition of a small business. Here we’ll explore exactly what that means and ways to take advantage of government resources for small businesses,
The SBA offers its Size Standards Tool, an online tool that will walk you through basic questions to help determine whether your business qualifies as a small business. You can also review the Table of Size Standards. There are some definitions that are helpful to understand before you use it.
It’s also worth noting that when it comes to eligibility for SBA assistance, a small business must be meet several other criteria, specifically, it must be:
A business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
The business may operate as a sole proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, though joint ventures can have no more than 49% foreign participation. (In addition, small agricultural concerns have a separate definition.)
If your business meets those criteria, you will want to continue exploring whether it meets the full SBA definition of a small business.
How to Qualify as a Small Business With SBA
SBA small business size standards are used to determine whether a business qualifies as a small business for SBA and federal contracting opportunities. There are three main measurements that go into determining whether a business is considered a small business:
- Number of Employees
- Annual Receipts/Revenues
Let’s look at each more closely.
Industry Code: NAICS
The first thing you’ll want to do when determining whether your business qualifies as a small business is to understand the industry in which it operates. The industry will determine whether revenues or number of employees will be used. There are two primary classification systems used to identify businesses by industry:
- Standard Industrial Classification (SIC) codes, and
- North American Industrial Classification System (NAICS) codes.
They are similar, but NAICS replaced the SIC in 1997 and is updated every five years. The SBA will use your businesses’ NAICS code first to help determine whether it is a small business.
If you haven’t already identified your businesses’ NAICS code, you can use Census.gov/naics to research possible options. If there’s not one that’s a perfect match, choose the closest option. Note that the NAICS code should indicate the businesses’ primary activity; the one that generates the most revenue.
These codes are self-reported; in other words they aren’t assigned by government agencies, and you don’t officially register with NAICS. However, this code may be requested when you apply for a small business loan or financing.
Tip box: SIC and/or NAICS codes may appear on your business credit reports. Check to ensure yours is correct.
Once you know your NAICS code, then you’ll be able to find out whether your specific industry will require size standards to be based on number of employees or receipts.
Number of Employees
In some industries, the number of employees will be used to determine SBA size standards. When that’s the case, the following will be taken into account:
The average number of employees of the business (including the employees of its domestic and foreign affiliates) based upon numbers of employees for each of the pay periods for the preceding completed 12 calendar months. (Emphasis added.) It’s important to note that part-time and temporary employees are counted the same as full-time employees.
In addition, for a new business that has not not been in business for 12 months, the average number of employees is used for each of the pay periods during which it has been in business.
For other industries, annual receipts will be used to determine whether the business qualifies as a small business. Generally, this refers to the “total income” (or “gross income”) plus the “cost of goods sold” based on the businesses’ federal tax returns. If the business has not yet filed a tax return, audited financial statements or other documentation may be used.
There are certain types of revenues that will be excluded from the calculation, including “capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income” (for example, sales tax collected from customers); “proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.”
Businesses that have been in business for five or more years will use annual receipts for the last five fiscal years divided by 5, except that SBA Business Loans — 7(a) Loans, SBA Microloans, the Intermediary Lending Pilot Program, and 504 Loans— and Disaster loans— including Physical Business Disaster Loans and Economic Injury Disaster Loans— use the last three years divided by 3. Newer businesses will use the period the organization has been in business divided by the number of weeks in business, multiplied by 52.
For businesses with affiliates (see below), the average annual receipts size of a small business concern with affiliates is calculated by adding the average annual receipts of the business with the average annual receipts of each affiliate.
The SBA considers business concerns and entities to be affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Whether control is exercised is not relevant here, so long as the power to control exists. The power to control exists when an external party has 50% or more ownership, and it may apply with less than 50% ownership.
This is important because when affiliation exists, the SBA will count the receipts and/or numbers of employees of all affiliates, foreign and domestic, even when they are nonprofits. This could result in a small business being classified as a large business due to affiliates.
Benefits of Qualifying as a Small Business
One of the main reasons to qualify as a small business is that your business will be eligible to apply for SBA loans. There are a number of SBA loan programs that offer low interest rates and attractive repayment terms for entrepreneurs who qualify. These include:
- 7(a) Loans, including 7(a) Small Loans
- Express Loans
- Export Loans
- Community Advantage Loans
- CDC 504 Loans
You’ll apply for SBA loans through lenders approved to make these loans (usually traditional financial institutions such as banks), unless you’re applying for a Disaster Loan, in which case you’ll apply at SBA.gov. The eligibility requirements for SBA loans vary somewhat, but your business must qualify as a small business to even be considered for one of these loans.
Certain government contracts are contracts reserved or set aside for small businesses. That gives small businesses the opportunity to compete against large businesses for government contracts. There are additional opportunities for:
- Small disadvantaged businesses under the 8(a) program,
- Women-owned businesses under the Women-Owned Small Business (WOSB) Federal Contracting program,
- Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses and
- Small businesses in HUBzones (historically underutilized business zones).
You can learn more about government contracting opportunities through federal agencies, and get free help for your small business (including technical assistance) by utilizing the resources found at SBA.gov.