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Small Business Administration (SBA) loans

How Does The SBA Define Small Business?

Updated: Jun 15, 2020

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Small businesses make the economy go round. The U.S. boasts roughly 30-million small businesses, which together fuel job creation and comprise 44% of GDP, according to the latest data. Small businesses are a major player in U.S. exports and employ nearly half of the country’s workforce. So it’s no wonder that entrepreneurs are proud to consider themselves part of this community. 

In fact, there are many perks to being a small business, including the opportunity to access financing from the Small Business Administration. SBA loans include attractive features like repayment terms of a decade or longer and interest rates that are capped by the agency. 

But to qualify for an SBA loan, your business must meet their definition of what comprises a small business. So how do you know if you fit the SBA small business definition? We’ve done the digging for you so that you aren’t left to wonder.

What the SBA looks for in business loan applicants

Let’s get a general overview of what the SBA is looking for before we dive into the details. Firstly, you should run a for-profit business. “For-profit” can lend itself to any legal structure, such as a sole proprietorship, partnership, c-corp, etc. It should be physically domiciled in the United States as well as operating inside the country or its territories. 

If the business is located outside of the United States, it’s not a deal-breaker. As long as your U.S. arm contributes significantly to the country’s economy in one way or another, you could still meet the SBA definition of a small business. Contributing to the economy means things like paying taxes or having a reliance on American-made products. You also shouldn’t be the dominant player in your industry. For instance, Uber and Lyft operate as a duopoly in the ride-sharing market. So, neither of them should expect any perks according to the SBA small business definition.  

The size of your business matters

To meet the SBA’s small business definition, your business must meet the size standard. The size standard is a reflection of either the number of employees or average annual receipts as per the North American Industry Classification System (NAICS) codes. The focus is either on the number of individuals you employ or your yearly revenues, depending on which sector in which your business operates. Be sure and include the employees and receipts from any affiliates in which you might own a stake. 

The employee side of the SBA small business definition

You should employ fewer than 500 employees, which may sound familiar as it’s also the threshold for the SBA’s Paycheck Protection Program (PPP). There’s a good chance you meet this qualification considering that businesses with fewer than 100 employees have the largest piece of the small business employment pie. Not to mention, tens of millions of entrepreneurs are a one-man band, so to speak, with zero employees. 

Of course, there are exceptions to the 500 employee rule. For instance, dog and cat food makers can employ up to 1,000 people and still fit the SBA definition of a small business. The high end of the range is an eye-popping 1,500, which might sound like a lot for the average small business. This allotment is reserved for segments such as rail and water transportation. 

To calculate the number of employees, take the average number of people employed for each pay period over the past 12 calendar months. This number should include part-time and temporary workers, regardless of the number of hours they’ve worked. If you’re a startup, work with the monthly payroll data you’ve accumulated. 

Average annual receipts

Your annual receipts are a snapshot of total income or gross income if you’re a sole proprietorship in addition to the cost of goods sold. If these items sound familiar, it’s because they can also be found on IRS income tax forms, including Form 1120, 1120S, 1065 and 1040 and others. 

Perhaps just as important are line items that aren’t included with receipts, including: 

  • Capital gains or losses
  • Taxes included in your gross or total income
  • Proceeds from deals with a business and its affiliates 
  • Amounts collected for a third-party via a travel/real estate/ad agents 

For the annual receipts limit, it largely depends on the sector in which you operate. The threshold to meet the government definition of a small business is as low as $1 million for growers ranging from soybean to peanut farmers. It’s $30 million for truck transportation companies, and beyond that for other industries.  

And there are some nuances within the parameters. For example, if you’re a new car dealership, your size is measured by the number of employees, which can’t exceed 200. For a used car dealership, however, size is based  on annual receipts, which shouldn’t surpass $27 million. 

For clarity’s sake, you’ll want to locate your industry on the NAICS code table. You can find the standards for your industry here.   

The SBA small business definition is in constant flux

The SBA reviews its size standard every half-decade. Incidentally, the agency acknowledged in its last comment period that its “size standards include more than 90% of firms for most industries.” It explains that not one of them dominates in their respective industry.  

Know the government definition of a small business before you grow 

If you’re thinking of financing or bidding for a government contract, it’s a good idea to know whether you meet the SBA definition of a small business first. Tallying up the number of employees or calculating your annual receipts should do the trick. The SBA even has its Size Standards Tool to streamline the process for you.  

If you are in that sweet spot and fulfill the SBA’s small business definition, it could open up some attractive opportunities for you. These include bidding on government contracts tailored for small businesses. It could also pave the way for SBA loans, which are high in demand. In the fiscal year of 2019, the SBA green-lighted nearly 60,000 loans in its 7(a) and 504 programs across $28 billion to small businesses. Meanwhile, Funding Circle has made it easier than ever to get one of these loans by becoming an official lender of SBA 7(a) loans. If you’re interested in applying for one of these loans and meet the SBA’s small business definition, start your application here

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