Small business owners who wish to receive an SBA loan or compete for federal small business contracts must meet the US Small Business Administration’s definition of a small business. Here we’ll examine exactly what that means and how you can leverage government resources for small businesses,
The SBA offers its Size Standards Tool, an online tool that walks you through basic questions to determine if your business qualifies as a small business. You can also consult the table of size standards. There are some definitions that you should understand before using them.
It’s also worth noting that when it comes to SBA support, a small business must meet several other criteria, specifically:
A for-profit organized corporation headquartered in the United States that conducts its business primarily in the United States or makes a significant contribution to the US economy through the payment of taxes or the use of American products, materials, or labor.
The company may operate as a sole proprietorship, partnership, limited liability company, corporation, joint venture, association, trust, or cooperative, although joint ventures may not have more than 49% foreign ownership. (In addition, small farms have their own definition.)
If your business meets these criteria, you should further investigate 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 contract opportunities. There are three main criteria used to determine whether a business qualifies as a small business:
- number of employees
- Annual earnings/income
Let’s take a closer look at each one.
Branch code: NAICS
The first thing you should do to determine if your business qualifies as a small business is to understand the industry in which it operates. The industry decides whether turnover or number of employees is used. There are two primary classification systems used to identify companies by industry:
- Standard Industrial Classification (SIC) codes and
- North American Industrial Classification System (NAICS) codes.
They are similar, but NAICS replaced SIC in 1997 and is updated every five years. The SBA first uses your company’s NAICS code to determine whether it is a small company.
If you haven’t yet identified your company’s NAICS code, you can use Census.gov/naics to search for possible options. If there isn’t one that fits perfectly, choose the next option. Note that the NAICS code should indicate the main activity of the company; 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 small business loan or financing.
tip box: SIC and/or NAICS codes may appear on your business credit reports. Check that yours is correct.
Once you know your NAICS code, you can find out if your specific industry requires sizing standards based on employee count or receipts.
number of employees
In some industries, the number of employees is used to determine SBA size standards. If this is the case, the following is taken into account:
The average number of employees of the company (including employees of its domestic and foreign subsidiaries) based on the number of employees for each of the pay periods for the previous completed 12 calendar months. (Emphasis added.) It is important to note that part-time and temporary workers are counted the same way as full-time workers.
In addition, for a newly formed business that has been inactive for 12 months, the average number of employees is used for each of the wage periods it has been operating.
For other industries, annual receipts are used to determine if 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 companies’ federal tax returns. If the company has not yet filed a tax return, audited financial statements or other documents can be used.
There are certain types of income that are excluded from the calculation including “capital gains or losses; Taxes collected for and remitted to a taxing authority when included in gross or total income” (e.g. sales tax collected from customers); “Income from transactions between a group and its domestic or foreign affiliates; and amounts collected by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder, or customs broker for others.”
Businesses that have been in business for five or more years use annual receipts for the past five fiscal years divided by 5, except for SBA business loans – 7(a) loans, SBA micro loans, the Intermediary Lending Pilot Program, and 504- Loans — and catastrophe loans — including physical business catastrophe loans and economic injury catastrophe loans — use the last three years divided by 3. Newer businesses use the period the organization has been in business divided by the number of weeks in business multiplied by 52
For companies with affiliates (see below), the average annual revenue size of a small affiliate company is calculated by adding the company’s average annual revenue to the average annual revenue of each affiliate.
The SBA considers corporations and businesses to be related entities when one controls or has the power to control the other, or a third party or third parties controls both or has the power to control both. Whether control is exercised is not relevant here as long as the power of control exists. The power of control applies when an outside party owns 50% or more of the shares and can apply to less than 50% of the shares.
This is important because when there is an affiliation, the SBA counts the revenue and/or the number of employees of all affiliated companies, both domestic and foreign, even if they are not-for-profit organizations. This could result in a small company being classified as a large company 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 is eligible to apply for SBA loans. There are a number of SBA loan programs that offer low interest rates and attractive repayment terms for qualified entrepreneurs. These include:
- 7(a) loans, including 7(a) small loans
- express credits
- export credits
- Community Advantage Loan
- CDC 504 loan
You apply for SBA loans through lenders licensed to make these loans (usually traditional financial institutions like banks) unless you are applying for a catastrophe loan. If so, apply to SBA.gov. 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 reserved for small businesses. This gives small businesses the opportunity to compete with large corporations for government contracts. There are additional options for:
You can learn more about federal procurement opportunities and get free help for your small business (including technical assistance) by using the resources at SBA.gov.
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