Small business owners who wish to obtain an SBA loan or compete for federal government contracts reserved for small businesses must meet the US Small Business Administration’s definition of small business. Here we’ll explore exactly what that means and ways to leverage government resources for small businesses,
The SBA offers its Size Standards Tool, an online tool that will guide you through basic questions to help you determine if your business qualifies as a small business. You can also consult the Size Standards Chart. There are some definitions that are useful to understand before using it.
It’s also worth noting that when it comes to eligibility for SBA assistance, a small business must meet several other criteria, specifically:
A business entity organized for profit, with an establishment located in the United States and that operates primarily in the United States or that makes a significant contribution to the United States economy through the payment of taxes or the use of products, US materials or labor.
The business may operate as a sole proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, although joint ventures cannot have more than 49% ownership foreign. (Also, small farms have a separate definition.)
If your business meets these criteria, you’ll want to continue exploring whether it meets the SBA’s full definition of a small business.
How to qualify as a small business with SBA
The SBA’s Small Business Size Standards are used to determine if a business qualifies as a small business for SBA and federal government contracting opportunities. Three main measures determine whether a business is considered a small business:
- number of employees
- Annual revenue/income
Let’s take a closer look at each.
Industry Code: NAICS
The first thing to do in determining if your business qualifies as a small business is to understand the industry in which it operates. The industry will determine whether revenue or number of employees will be used. There are two main classification systems used to identify companies by industry:
- Standard Industrial Classification (SIC) Codes and
- North American Industry Classification System (NAICS) codes.
They are similar, but the NAICS replaced the SIC in 1997 and is updated every five years. The SBA will first use your business’s NAICS code to help determine if it is a small business.
If you have not yet identified your company’s NAICS code, you can use Census.gov/naics to search for possible options. If there isn’t one that matches perfectly, choose the closest option. Note that the NAICS code must indicate the principal activity of the business; the one that generates the most revenue.
These codes are self-reported; in other words, they are not assigned by government agencies and you are not officially registering with NAICS. However, this code may be requested when applying for a small business loan or financing.
Tip box: SIC and/or NAICS codes may appear on your company’s credit reports. Check that yours is correct.
Once you know your NAICS code, you will be able to tell if your specific industry will require size standards to be based on the number of employees or receipts.
number of employees
In some industries, the number of employees will be used to determine SBA size standards. When this is the case, the following elements will be taken into account:
The average number of company employees (including employees of its domestic and foreign subsidiaries) based on the number of employees for each pay period for the preceding 12 full calendar months. (Emphasis ours.) It is important to note that part-time and temporary employees are counted the same as full-time employees.
Also, for a new business that has not been in business for 12 months, the average number of employees is used for each pay period it has been in business.
For other industries, annual revenue will be used to determine if the business is considered a small business. Typically, this is “total revenue” (or “gross revenue”) plus “cost of goods sold” based on federal business tax filings. If the business has not yet filed a tax return, audited financial statements or other documents can be used.
Certain types of income will be excluded from the calculation, including “capital gains or losses; taxes collected and remitted to a taxing authority if included in gross or total income” (for example, sales tax collected from customers); “the proceeds of transactions between a company and its national or foreign subsidiaries; and amounts collected for others 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 years or more will use annual revenue for the last five fiscal years divided by 5, except that SBA Business Loans – 7(a) Loans, SBA Microloans, Intermediate Loan Pilot Program, and Loans 504 – and disaster loans – including physical disaster loans for businesses and economic disaster loans – use the last three years divided by 3. New businesses will use the period in which 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 revenue size for a small business with affiliates is calculated by adding the average annual revenue of the business to the average annual revenue of each affiliate.
The SBA considers companies and entities to be affiliated with each other when one controls or has the power to control the other, or one or more third parties control or have the power to control both. Whether control is exercised is irrelevant here, as long as the power to control exists. Power of control exists when an outside party owns 50% or more ownership, and it can apply to less than 50% ownership.
This is important because where the affiliation exists, the SBA will count the revenue and/or number of employees of all affiliates, foreign and domestic, even when they are non-profit. This could cause a small business to be 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 qualifying entrepreneurs. These include:
- 7(a) Loans, including 7(a) Small Loans
- Express Loans
- Export loans
- Community Advantage Loans
- CDC 504 Loans
You will apply for SBA loans through lenders approved to provide these loans (usually traditional financial institutions such as banks), unless you are applying for a disaster loan, in which case you will apply on SBA.gov. SBA loan eligibility requirements vary somewhat, but your business must be considered a small business to even be considered for one of these loans.
Some government procurements are set aside or small business only. This gives small businesses the opportunity to compete with larger companies for government contracts. There are additional possibilities for:
You can learn about government contracting opportunities through federal agencies and get free help for your small business (including technical assistance) using the resources available at SBA.gov.
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