What’s a small business? The SBA has 1,030 different answers

How can a bake shop earn nearly twice as much as a butcher and still qualify for SBA loans? The quirky (and complicated) way the agency defines a small business.
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Grant Thomas

· 4 min read

In the US, where the Small Business Administration (SBA) helps with loans, determines government-contract eligibility, and provides free business consultants, it pays to have the agency consider you a small business. But determining if you are one is not as simple as sidling up to the are-you-tall-enough-to-ride sign for the roller coaster.

Depending on the type of business, the SBA’s litmus test is either a company’s maximum annual revenue or its employee count. Unlike such sectors as manufacturing, farming, and wholesalers, which are evaluated on employees, retailers are considered on revenues.

Biggie smalls: The revenue standard varies widely, even among retailers that may seem similar.

  • Men’s clothing stores qualify as small businesses if revenues are <$22.5 million, but the upper limit is $30 million for women’s clothing stores and $41.5 million for family clothing stores.
  • Markets that exclusively sell meat, seafood, or produce qualify if they make <$8 million, but the upper limit is $14 million for baked-goods stores, $32 million for convenience stores, and $35 million for supermarkets.
  • Hardware stores qualify if they make <$14.5 million, but the upper limit is $30 million for paint and wallpaper stores and $41.5 million for home centers.

Tom Sullivan, VP of small-business policy at the US Chamber of Commerce, told us that the way that SBA employees assisted companies during the pandemic was “the definition of public service.” But when it comes to how the agency determines what a small business is?

“This is the only regulatory foundation that I’m aware of where the European Union has less red tape than the United States,” Sullivan said.

Petite enterprise: When it adopted the Small Business Act for Europe in 2008, the European Commission “was very aware of…the SBA’s definitions used to determine small-business eligibility for assistance,” according to a 2016 report from the Congressional Research Service.

The EU adopted a comparatively simple size standard for all businesses, albeit with three tiers.

  • Medium-sized businesses are defined by having <250 employees and either ≤€50 million in revenue or a ≤€43 million balance-sheet total.
  • Small businesses are <50 employees and ≤€10 million in revenue or balance-sheet total, while micro businesses are <10 employees and ≤€2 million in revenue or balance sheet total.

Small things considered. “People think that…by having the size standard vary from industry to industry, that the size standards are too complex,” Khem Sharma, chief of the Office of Size Standards at the US Small Business Administration, told us. “We often hear from the public that, ‘Why can’t we have one size standard like the European Union has?’”

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In the US, the revenue standard for, say, a family clothing store is nearly twice that of a men’s clothing store because overall there are fewer men’s stores, which on average make less money, and the SBA wants to spur competition. Sharma’s team of economists make calculations, including the average revenue within a category, the number of businesses, startup costs, and the share of federal contracts they get.

Businesses fall into one of 1,030 industrial classifications, which the SBA recalculates every five years. The SBA releases those suggested standards, which are then open for public comment. Then—here’s where some think the process veers from economics to politics—lobbyists and lawmakers clamor for more relaxed standards for their clients and constituents.

“What we have faced from [the year the Small Business Act passed in] 1953 to the present is virtually nothing other than acquiescence to the demands of the special interest groups,” Representative John J. LaFalce of New York, who served as chair of the House Committee on Small Business Subcommittee, said in 1979. “That is how the size standards have been set.”

Their own private Idaho: In May, the founders of Goodbuy, a Boise startup that lists products from ~185,000 small businesses on its app and online store, told us that it was using the SBA’s size standard as the determinant. But…

“We would have people going through this whole onboarding process” to be a part of Goodbuy, co-founder Cary Fortin told us. “Sharing their website, their business values, their owner identities…and then at the end, they’d get this little note [from us] saying, like, ‘Oops, you’re too big, but we’re, you know, so impressed by you.’ And we would go and look at those businesses and think, ‘They don’t feel too big.’”

So Goodbuy said goodbye to the SBA size standard, and adopted a single standard: an upper revenue limit of $50 million.

“We just had to sort of scrap the SBA standards,” Fortin said.—AAN

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