Maria Contreras-Sweet, the newly appointed Administrator of the Small Business Administration, recently announced an updated formula for defining “small” at the SBA. The bottom line is that starting July 14th thousands of companies that were considered too big to qualify for SBA programs will now be considered small. This new status means access to cheaper financing and new sales opportunities.
It’s kind of a big deal.
SBA small business size standards: how the SBA measures the size of your business
The SBA exists to foster a thriving small business sector. But what exactly is a “small” business? It isn’t an easy question to answer since small is relative. Rather than attack the problem with a blunt instrument and assume that small can be narrowed down to a single number, the SBA takes a more sophisticated approach. First, it organizes companies according to NAICS codes. For each code, it determines if the appropriate metric for size should be money or people. Finally it establishes a limit for that particular NAICS code.
For example a Framing Contractor (NAICS 238170) can have up to $14 million in annual receipts and be considered small regardless of how many people it employs. A Breakfast Cereal Manufacturing company (yes they have their own NAICS – 311230) can have up to 1,000 employees and be considered small. The official list of size standards by NAICS code is available here.
If money is the size standard, the formula can be a little tricky. It uses a three-year average of your “annual receipts” as defined by the IRS. To calculate your annual receipts you need to find the “total receipts” line and the “cost of goods sold” line and add them for each of the past three years. The average of these three “annual receipts” amounts will determine if you are considered small or not by the SBA. If you haven’t filed tax returns for each of the past three years, then you need to use a modified formula where you calculate an average weekly “receipts” number and multiply it by 52 weeks.
If number of people is the size standard the formula is a little easier. The SBA counts the average number of employees for all pay periods during the previous 12 months. Full-time employees, part-time employees and temporary employees all count equally. A company with 50 full-time staff, 20 part-time staff and 10 temps would use 80 as their people count.
Why the change in size standards
The SBA decided to adjust the size standards to address the impact of inflation on size standard calculations. It’s been 6 years since the SBA updated its standards and many businesses that were just below the annual receipts threshold were pushed over and barred from participating in government contracts or SBA loan programs simply because they raised prices to keep up with inflation. It also meant that certain small businesses that were important suppliers to the federal government could no longer participate because of their size, depriving Uncle Sam of a needed supplier.
What this means for your business
According to the SBA over 8,000 companies will now requalify as small. This means that they can regain eligibility for federal programs including SBA loan support, disaster loans and small business set aside programs for procurement purposes. For companies that thought they were too big to be considered small, it’s time to take a closer look at these standards. It could be that you can start competing again for small-business set aside contracts or apply for favorable SBA lending. For companies that are smaller, this change could mean new competition for government contracts. Either way, change is coming and its best to prepare.
