Sba size standards

What Are SBA Size Standards?

SBA size standards are quantitative thresholds established by the U.S. Small Business Administration (SBA) that define whether a business entity qualifies as a "small business" for the purpose of various federal programs and preferences. These standards are a critical component of Business Regulations, dictating eligibility for government contracting opportunities, loan programs, and other forms of federal assistance designed to support and promote small business growth. The specific criteria for SBA size standards vary significantly by industry, primarily relying on either the average annual receipts or the average number of employees of a firm.

History and Origin

The concept of defining "small business" for federal support dates back to the early 20th century, culminating in the establishment of the Small Business Administration. Before the SBA, agencies like the Reconstruction Finance Corporation (RFC) and the Smaller War Plants Corporation (SWPC) provided assistance, particularly during the Great Depression and World War II.²³ The SBA was officially created on July 30, 1953, when President Dwight D. Eisenhower signed the Small Business Act into law. This act aimed to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns."

Initially, the SBA was intended to be a temporary agency, replacing the RFC, which had faced criticism regarding its lending practices and efficiency.²¹, ²² The new agency was tasked with encouraging private lenders to finance small businesses by offering government loan guarantees, and it also sought to ensure that small businesses received a fair share of Federal contracts.²⁰ Over the decades, the SBA's mission expanded, and with it, the necessity for clear and dynamic SBA size standards to determine eligibility for its growing array of programs. These standards are regularly reviewed and updated to reflect economic changes and industry conditions.¹⁹

Key Takeaways

• SBA size standards define eligibility for federal small business programs and contracting.
• They are primarily based on a business's average annual receipts or average number of employees.
• Standards vary by industry, linked to specific North American Industry Classification System (NAICS) codes.
• SBA reviews and adjusts size standards every five years to account for inflation and economic shifts.
• Businesses must include the size of affiliates when determining their overall size status.

Interpreting the SBA Size Standards

Understanding SBA size standards requires careful attention to industry-specific criteria. For most industries, a business is categorized as small if its average annual receipts over the past five complete fiscal years do not exceed a certain monetary threshold, or if its average number of employees over the latest 24 calendar months does not exceed a specified limit.¹⁷, ¹⁸

The SBA provides a comprehensive table of size standards, organized by NAICS codes, which are statistical classifications used to categorize businesses by industry in the U.S.¹⁵, ¹⁶ When interpreting a business's size, it's crucial to consider not only the company itself but also its affiliation rules with other businesses. The SBA considers the employees or receipts of all affiliates when determining the size of a business, regardless of whether the affiliates are for-profit.¹³, ¹⁴ This means that even if a business appears small on its own, its combined size with subsidiaries or controlling interests could push it over the relevant SBA size standard.

Hypothetical Example

Consider "EcoBuild Solutions," a construction company specializing in green building. To determine if EcoBuild Solutions qualifies as a small business for a federal contract, they would first identify their primary NAICS code, which might be 236220 (Commercial and Institutional Building Construction).

Upon checking the SBA's table of size standards, they find that for NAICS code 236220, the size standard is based on average annual receipts, perhaps set at $39.5 million. EcoBuild Solutions calculates its average annual receipts over its last five complete fiscal years:

• Year 1: $32,000,000
• Year 2: $35,000,000
• Year 3: $38,000,000
• Year 4: $40,000,000
• Year 5: $37,000,000

The sum of these receipts is $182,000,000. Dividing by five, the average annual receipts are:

Since their average annual receipts of $36.4 million are below the $39.5 million size standard for their NAICS code, EcoBuild Solutions would qualify as a small business and be eligible to bid on contracts set aside for small businesses in this industry. If EcoBuild Solutions had any affiliates, their receipts would also need to be included in this calculation.

Practical Applications

SBA size standards have widespread practical applications across various facets of the U.S. economy:

• Government Contracting: A primary use of SBA size standards is to determine eligibility for federal procurement opportunities set aside exclusively for small businesses. This includes programs like the 8(a) Business Development Program, HUBZone, Women-Owned Small Business, and Service-Disabled Veteran-Owned Small Business programs. Businesses exceeding the applicable size standard are generally considered "other than small" and cannot compete for these set-aside contracts.
• Loan and Financial Assistance Programs: The SBA offers various loan guarantee programs, such as 7(a) loans and 504 loans, to help small businesses access capital. Meeting the relevant SBA size standards is a prerequisite for applying for these financial products, which often provide more favorable terms than conventional commercial loans.¹²
• Economic Impact and Data Analysis: The SBA, along with other government agencies and researchers, uses these size standards to collect data, analyze the health of the small business sector, and assess the impact of policies aimed at economic recovery and growth. The U.S. Government Accountability Office (GAO) has, for instance, examined how effective these standards are in directing assistance to target businesses and the impact on mid-sized firms.¹¹
• Advocacy and Policy Making: The definition of a small business influences advocacy efforts in Congress and informs debates on policies designed to support entrepreneurship and innovation. The SBA regularly reviews its methodology for establishing and adjusting size standards, seeking public comment to ensure they remain relevant to current market conditions.¹⁰
• System for Award Management (SAM.gov) Registration: Businesses seeking to do business with the federal government must register in System for Award Management (SAM.gov) and self-certify their small business status based on the applicable size standards. This registration is crucial for participation in federal contracts.⁸, ⁹

Limitations and Criticisms

While essential for guiding federal assistance, SBA size standards face several limitations and criticisms:

One common critique revolves around the "one-size-fits-all" challenge within broad industry classifications. Even within a specific NAICS code, there can be significant variations in market dynamics, competitive landscapes, and capital requirements among businesses. A single size standard may not adequately distinguish between genuinely small, struggling businesses and those that are relatively large and well-established within that classification. Some analyses, even historically, have suggested that size standards can define a high percentage of industry firms as "small," including those that control a significant portion of an industry's sales, potentially diluting the intended impact of small business programs.⁷

Another concern is the "graduation" effect. As businesses grow and exceed a size standard, they lose eligibility for small business set-asides and support, which can be a difficult transition. This can sometimes create a disincentive for growth or lead businesses to artificially limit their size to maintain small business status. While the Small Business Runway Extension Act of 2018 aimed to alleviate this by extending the calculation period for annual receipts from three to five years, allowing businesses more time to grow before "graduating" out of small business status, the transition still presents challenges.⁶

Furthermore, the process of reviewing and updating size standards, while regular (every five years), may not always keep pace with rapid technological changes and evolving economic conditions in certain industries, leading to standards that might be outdated for some emerging sectors.

SBA Size Standards vs. NAICS Codes

SBA size standards and North American Industry Classification System (NAICS) codes are intrinsically linked but serve distinct purposes:

Essentially, NAICS codes provide the framework for categorizing industries, while SBA size standards apply specific numerical thresholds within those industry categories to define small business eligibility. A business must first identify its appropriate NAICS code to then determine which SBA size standard applies to it for federal programs. Confusion can arise if a business operates in multiple sectors, requiring careful determination of its primary NAICS code and the corresponding size standard.

FAQs

What are the two primary metrics used for SBA size standards?

The two primary metrics are average annual receipts and average number of employees. Most industries use one of these two metrics, though a few specialized industries might use other measures like financial assets.⁵

How often are SBA size standards reviewed?

SBA size standards are reviewed and adjusted by the Small Business Administration at least once every five years to reflect changes in industry structure and economic conditions, including inflation.³, ⁴

Do SBA size standards apply to all businesses?

SBA size standards specifically apply to businesses seeking to participate in federal government programs, such as government contracting set-asides, loan programs, and other forms of federal assistance for small businesses. They do not universally define "small" for all purposes outside of federal programs.

What happens if a business exceeds its SBA size standard?

If a business exceeds its applicable SBA size standard, it is generally no longer considered a "small business" for new federal contracts or programs. It would then be classified as "other than small" and would compete for open-market contracts rather than those set aside for small businesses. Existing contracts typically remain valid, but the business's status for future opportunities changes.²

How does affiliation affect SBA size standards?

When determining whether a business meets an SBA size standard, the SBA aggregates the employees or receipts of the business itself and all of its domestic and foreign affiliates.¹ This means that ownership, common management, or contractual relationships with other entities can impact a business's overall size determination. Businesses must account for these affiliation rules to accurately assess their eligibility.