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How Fitting The SBA’s Small Business Definition May Help Your Business

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Aug. 4 2021, Published 4:30 a.m. ET

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If you own a small business and don’t want to use all of the money in your business savings account to fund its growth, you should consider other funding options, like an SBA loan. To qualify, your business would have to meet the SBA’s small business definition requirements. Currently, to fit the SBA’s definition of a small business, your revenue would have to be between $1 million to $41.5 million, depending on your industry, and you can employ anywhere from 100 to 1,500 employees.

How the SBA defines ‘small business’

*Varies by industry

The most important factors determining whether or not a business meets the SBA’s definition for “small” are the company’s industry, revenue and number of employees. The SBA provides a lengthy table describing employee and revenue limits for each industry, organized by NAICS code. Since the SBA reviews the size standards every five years, they are subject to change.

Which employees count?

All workers, including those employed on a full-time, part-time and temporary basis, contribute to your overall employee count. If you acquired another business, employees from that business would also contribute to your total. The SBA takes an employee count on a 12-month basis, or counts employees for each pay period if you have not yet been in business for a full year.

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Why does the SBA’s ‘small’ definition matter?

Certain government contracts and loan programs from the SBA are reserved for small businesses. To ensure the right companies receive these opportunities — including the relatively low interest rates that come with its loan programs — the SBA enforces eligibility requirements. If your company doesn’t match these small business definition criteria outlined by the SBA, you won’t qualify for those contracts or programs.

Furthermore, the SBA requires that small businesses also meet the following requirements to be eligible for funding:

  • For-profit, officially registered and operating legally
  • Physically located in the U.S. and operating in the U.S. or its territories
  • Invested equity from the business owner
  • Sound business purpose
  • Ability to repay any debt
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Types of SBA funding for small businesses

Businesses that meet the SBA’s small business definition and other small business qualifications can apply for SBA loan programs and federal contracting assistance. Your small business could be eligible for the following SBA-backed loans:

7(a) loan program: The SBA’s most popular program provides general-purpose loans for small business owners. You could borrow up to $5 million with repayment terms up to 25 years. Specialty loans within the 7(a) programs are available for certain needs like smaller loan amounts, export working capital or express time to funding.

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CDC/504 loan program: Small businesses looking to acquire fixed assets — such as buildings, land or machinery — can borrow funds to finance their purchase. The maximum amount a business can borrow is $5 million for large assets that expand the business and create job opportunities. (Energy-efficient and manufacturing projects, as well as commercial real estate purchases, may qualify for up to $5.5 million.)

These loans are only available by using a Certified Development Company (CDC): Typically, the CDC provides up to 40% of the loan and a lender covers 50%. The business owner contributes the remaining 10%. The assets being purchased serves as collateral on the loan.

Microloan program: For smaller funding needs, the SBA microloan program provides up to $50,000 to small businesses that have trouble qualifying for traditional business loans. Repayment terms for microloans typically max out at six years. SBA microloans are generally targeted at women, low-income, veteran and minority business owners.

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8(a) Business Development program: The SBA limits competition for certain government contracts to small businesses that participate in the 8(a) program. The goal is to help disadvantaged businesses win valuable contracts. To be eligible for the program, an owner who is economically or socially disadvantaged must control at least 51% of the business. The owner must also have a personal net worth of $750,000 or less, $6 million or less in assets or $350,000 or less in average adjusted gross income for three years. In addition, business owners must show good character and potential to successfully perform.

If approved for the 8(a) program, you could compete with similar businesses for set-aside or sole-source contracts — contracts federal agencies reserve for small businesses. You could also receive assistance such as business training, counseling or marketing help from a mentor who is also participating in the program.

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Other benefits of meeting the SBA’s small business size standards

SBA-approved small businesses could