Most small business owners would like to see their enterprises grow in size, perhaps someday to the point where they are no longer considered small businesses. The question is, what is “small,” who decides that definition and what difference does it make anyway?
Throughout last year, as the Small Business Administration updated its definitions of what constitutes a small business in the U.S. while interested parties weighed in with the agency and the media to point out the pros and cons of the proposed changes. At roughly the same time, some private business lenders such as Bank of America were reorganizing their loan portfolios based on new internal guidelines, and federal legislation was enacted that modifies what is considered small for purposes of financial reporting.
The latter came in the form of the JOBS Act, which sailed through the lawmaking process with both uncharacteristic bipartisan Congressional support and Presidential backing. The Act was designed to boost job creation by making it easier for investors to financially back new businesses. It allows a company to have up to 2,000 investors before it has to register its shares with the Securities and Exchange Commission, a fourfold increase over the old limit of 500.
There will always be a blurry line between where small leaves off and medium begins, but for some purposes a clear line must be drawn, however arbitrary. The small business category has always included enterprises that are well beyond the mom-and-pop stage. For instance, banks report as small business loans any funds borrowed by businesses with less than $20 million in annual revenues.
The recent redefinition of small business, however, now applies the category to some firms that would have been considered solidly medium-sized in the past. For some companies that means more competition from newly designated small businesses – over 27,000 of them, according to the Wall Street Journal – and for some companies it means gaining new favor and protection over much larger corporations.
Eligibility for government-backed loans through the SBA and for federal contract small business set-asides depends critically on how small business is defined. Product-based businesses such as manufacturers, dealers and distributorships are classified by the SBA according to the number of employees they have, while service businesses are categorized by their annual sales. The SBA has also taken the approach that the definition of “small” depends on which specific industry you’re talking about. The agency’s website has a detailed table that businesses can use to determine if they’re officially small within their industry.
With the annual sales criteria, some adjustments have naturally been required over the years just to account for the effects of inflation. In all types of businesses, however, the SBA is re-evaluating its definition of small to take into account new realities of scale. Small businesses are supposed to be awarded 23 percent of federal contracts, and medium-sized businesses sometimes find themselves in a no-man’s land – not small enough to qualify for a set aside, but not large enough to compete with huge corporations for federal contract awards.
Two of the latest industries to be redefined by the SBA are architecture and engineering. An architecture firm can now be considered small if it brings in annual average revenue over a 3-year period of $7 million or less, an increase of more than 50 percent. Engineering firms can now be considered small with annual average revenue up to $14 million, more than triple the previous limit. The SBA is continuing to re-evaluate its size criteria for other industries too.
Whatever the size of your company, being a small business owner has never been an easy role. That’s why it’s good to have expert help from PADGETT BUSINESS SERVICES®. We have more than 400 offices across North America, providing dedicated small business bookkeeping, employee payroll and business tax services from experienced professionals.