Why the SBA’s Small Business Definition Makes a Big Impact – The Motley Fool | Region & Cash

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There is a wealth of resources for small businesses. If your business falls under the SBA’s small business definition, learn how to take advantage of all the available benefits.

America is a nation of entrepreneurs. According to the Small Business Administration (SBA), small businesses make up more than 99 percent of businesses and create 65 percent of new jobs in the United States.

But the go-it-yourself bootstrap mentality that drives so many entrepreneurs to start their businesses can stand in their way as they face the inevitable challenges of development and growth.

Because the small business sector creates so much value, many government agencies and private organizations are committing resources to help them grow and thrive. Small businesses that leverage these resources dramatically increase their chances of success in the long run.

What is considered a small business?

The SBA broadly defines small businesses as companies with fewer than 500 employees and startups as companies that have been in business for a year or less. However, what is “small” in a retail store versus a utility is another matter entirely. As such, the SBA provides refined definitions for each business type, based on either number of employees or annual revenue.

While agencies like the Internal Revenue Service and the Equal Employment Opportunity Commission measure businesses by different standards, the SBA’s small business definition is most commonly used to allocate government and private resources to small businesses.

company type

To determine if your business qualifies as small, you need to understand the SBA’s specific measurement, which is based on the North American Industrial Classification System (NAICS) code for your business type. For a full breakdown by industry, see the Electronic Code of Federal Regulations.

SBA also offers an online size standards tool to help you measure your business size.

Screenshot of SBA's online company size measurement tool home page.

SBA’s measurement tool makes it easy to find out if your business qualifies as small. Image source: author

Non-US companies can still qualify as an SBA small business if they have a US operation that makes a significant contribution to the US economy through the payment of taxes or the use of American products, materials or labor.

Annual Revenue

Many companies are measured by their average annual revenue, which SBA defines as the average of their gross annual revenue over the past three years. Small business size based on annual revenue can be as low as $1 million for farms and $41.5 million for hospitals.

Retail, agriculture, construction, and service companies are generally measured by average annual revenue, but there are many exceptions. For example, used car dealers are measured by revenue while new car dealers are measured by the number of employees. Because of this, it is important to look up the threshold for your specific NAICS classification.

The SBA defines average annual revenue as “all income in any form whatsoever from any source, including from the sale of any product or service, interest, dividends, rent, royalties, fees or commissions, less returns and commissions.” In general, earnings are equal to the sum of your total income (if you are a sole proprietor, your gross income) plus the cost of goods sold as reported on your tax returns.

Receipts do not include:

● Net capital gains or losses

● Taxes, such as sales taxes, that are levied and remitted when included in gross or total income

● Revenue from transactions between a group and its affiliates

● Amounts collected by agents or brokers for others

number of employees

Mining, manufacturing, wholesale, and utilities are generally measured by the number of employees. Some industries, like transportation and information services, are split down the middle. For example, among information services, print publications and music production are measured by employees, while film production is measured by annual revenue.

Again, the size range for small businesses varies greatly by number of employees, from just 100 employees at sporting goods wholesalers to 1,500 at railroads.

To determine the number of employees, SBA counts each employee as one employee, whether full-time, part-time, temporary, or through a professional employee organization or lease arrangement. The count is not based on hours worked or full-time equivalents. Volunteers are not counted.

The number of employees is averaged over the previous year or, in the case of start-ups, over the total number of available accounting periods.

affiliates

If your company has affiliated companies, their employees and receipts will be taken into account when measuring your company. Affiliates are entities with power to control your business, defined as having a 50% ownership or more, whether or not they exercise that control. Companies with less than 50% ownership can achieve affiliate status through contractual agreements or other measures.

SBA determines affiliation in accordance with 13 CFR 121.103. For more detailed information, see the SBA’s Size and Affiliation Compliance Guide.

Why is the SBA definition of small business important?

Using the SBA’s tools, it’s easy to determine the small business threshold for your industry and apply it to your business. And it’s worth the effort, because the size of your small business determines whether you qualify for a variety of loans, grants, special programs and contract opportunities available only to small businesses.

Below are just a sample of the many potential benefits of being small.

loans and grants

Funding can be a major hurdle for small businesses, and the SBA offers many assistance programs. SBA-guaranteed loans, available through many lenders, offer attractive interest rates and loan terms. In addition to guaranteed loans, the SBA’s Small Business Investment Companies program provides access to capital through private investment funds.

There are also special programs to support research and development by small businesses. These include the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program. These are competitive, awards-based programs that offer small businesses a mix of grant and contract opportunities.

In addition to what the SBA offers, there are myriad small business grants awarded by federal agencies such as the U.S. Department of Agriculture, the National Institutes of Health, and the Department of Energy, as well as state and local government agencies.

In addition to government funding, many private grants are only available to small companies. Some examples are the FedEx Small Business Grant, the Cartier Women’s Initiative and the recently established Visa Foundation.

government contracts

The benefits for small businesses go well beyond loans and grants. To encourage the development of the small business sector, the government provides 23% of the federal contract money awarded to small businesses each year. The government also makes set-aside land available to small businesses as follows:

● 5% for small disadvantaged businesses

● Three percent for HUBZone (Historyly Underutilized Business Zone) certified companies.

● Five percent for small businesses run by women

● Three percent for small businesses owned by war veterans

The SBA website provides instructions on how to register for government contracts, as well as resources to help you successfully compete for your share of these small business set-asides.

development programs

In addition to helping with financing and contracting opportunities, SBA provides consulting, training and technical assistance in all aspects of running a small business through Small Business Development Centers (SBDCs) located in the United States and its territories.

SCORE, an SBA nonprofit partner, also offers free advice and resources for startups and small businesses. According to SCORE, small business owners who receive three or more hours of mentoring report increased sales and growth.

8 steps to help your small business succeed

If you’re looking for ways to improve your business development efforts, make sure you use these programs to your advantage. Do your due diligence and make the most of your small business status by:

  1. Measurement of your company with the SBA measurement tool
  2. Determine if your business qualifies for targeted assistance based on majority ownership by women, minorities, veterans, or other historically disadvantaged groups
  3. Exploring financial solutions designed specifically for small businesses
  4. Looking for small business grants
  5. Research federal contract opportunities and pursue registration if desired
  6. Pursuing state and local government contracting opportunities for small businesses
  7. Contact your local SBDC to explore programs and resources
  8. Take advantage of SCORE’s extensive support services
  9. Support your small business

The power of small thinking

Entrepreneurs can benefit from thinking big and starting their own business, but small businesses need resources to survive over the long term.

Take advantage of the wealth of possibilities your small size offers, and one day you might just outgrow them.

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