MONEY

Big or Small, This SBA Definition Tweak Affects You

The Small Business Administration opened its services to thousands of additional businesses. Here's what that means for your company.

What's a small business?

500: Current employee limit for "small business," as defined by the SBA.

$7 million: Current revenue limit for "small business," as defined by the SBA.

$19 million: Maximum revenue a theater company can have and still be considered SBA-program eligible after July 22.

$35 million: Maximum revenue a sports team or club can have and still be considered SBA-program eligible after July 22.

$500 million: Maximum revenue a commercial bank can have and still be considered SBA-program eligible after July 22 (up from $175 million).

18,000: Estimated number of U.S. businesses to be affected by this definition change.

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"Small business" just got a whole lot bigger.

The U.S. Small Business Administration announced Friday it is increasing the amount of revenue a company can have and still qualify as small. It's part of a much-needed reassessment of size standards-- the SBA has not updated its criteria since the late 1970s--that will allow a far greater breadth of companies to benefit from government programs.

Qualifying as a small business can open the doors to millions of dollars worth of federal contracts and SBA loans, as well as involvement in SBA-run programs such as its small business investment companies and advanced research grants. Certification as a small business also allows the SBA to add a company to a database of potential small business contractors.

"Companies that have outgrown their size standard might qualify for being small again, and the companies that are still small will have more room to grow and still qualify as small," says Khem Sharma, size standards division chief for the SBA. "And government agencies will have a larger pool of businesses to choose from, and this will hopefully give them better competition and prices."

The federal government has a goal of giving 23 percent of its contracts to small businesses. Small businesses received about $100 billion in federal government contracts in 2012.

Still, the changes may ruffle feathers with much smaller business owners that must now compete with much larger competitors in their categories. The revenue changes also make it easier to choose bigger small businesses contracting agents think are more capable of fulfilling contracts.

"Sometimes the comment we hear from small businesses is that we need more capital and employees to perform the work for the government," Sharma says, adding that this was only a sideline driver for the revenue overhaul.

It's also long been a source of some contention that as businesses grow, they maintain their small-business status for five full years after qualifying for a government contract. In the life of a fast-growing company, that five years can be more like five decades for a slow growth company. (The top 100 companies on the Inc. 500 list for 2012 had three-year growth rates between 3,000 percent and 23,000 percent--and at those rates, after five years, they are no longer "small.") Similarly, companies that get acquired by larger businesses must self-report the change, and there can be time lags.

Generally speaking, the SBA defines a small business as one with fewer than 500 employees and revenues less than $7 million. But the SBA analyzes small businesses according to the hundreds of existing North American Industry Classification System codes, and it has created numerous exceptions based on the average size of businesses in that particular industry.

Starting July 22, changes will occur in four NAIC sectors including agriculture and forestry, finance, management, arts and entertainment, and recreation. Sports teams and clubs now have an upward range of $35 million, expanded from $7 million. Theater companies will jump to $19 million, also from $7 million. Commercial banks, however, will jump to $500 million the former $175 million and can still be considered small.

The changes will affect nearly 18,000 individual businesses, the SBA says. And, there's more to come: Over the next year, the SBA will also review small-business size standards according to the number of employees. That's likely to mean more competition for the smallest businesses.

Last updated: Jun 21, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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