Defining ‘Small Business’

The term “small business” has been thrown around a lot in the last few years as the U.S. struggled through a recession and presidential candidates fought over “Main …

The term “small business” has been thrown around a lot in the last few years as the U.S. struggled through a recession and presidential candidates fought over “Main Street,” but experts note that the definition of a small business changes from industry to industry. Small businesses in the farming and building industries are defined by revenue, while in manufacturing it’s determined by a business’s number of employees. This can make a difference in whether those businesses can be eligible for loans and assistance from organizations like the Small Business Association. For more on this continue reading the following article from TheStreet.

Small business is one of those terms we take for granted — until we try to dig down to what it really means. Ithe United States, a small business can be anything from a suburban coffee shop to a rural farm stand to a thriving manufacturing company with IQMS software that exports worldwide, with workforces that vary from one person to hundreds of employees. Can one definition cover such radically different enterprises?

The flexible nature of “small business” became even more obvious this year, when the Small Business Administration revised its guidelines for exactly how small a company must be to be eligible for its services and loans. In its latest attempt to categorize small businesses, the SBA expanded the maximum size of businesses in more than two dozen industries, with some definitions stretching the meaning of “small.”

In farming and agriculture-related businesses, “smallness” is measured by revenue, not employment, acknowledging the seasonal and short-term nature of much farm work. Most farming operations are considered “small” if they make $750,000 a year or less, yet a company that offers farm management services is “small” if it makes less than $7 million.

Switch to building-related companies (another field where employees tend to be short-term and/or seasonal), and the numbers are drastically higher. According to the SBA, a “small” remodeling or contracting business is one that earns $14 million or less a year. A residential or commercial construction company, however, can make up to $33 million a year, yet still get the preferential services and loan terms of a “small” business.

Most industries that produce durable goods are classified by employment, with the maximum number of workers ranging from 500 to 1,000 to be considered a small business. (Companies that sell wholesale, on the other hand, can have no more than 100 employees.)

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Whether a business is small depends in part on what it produces: if you make cheese or chocolates, you’re small if you have 500 employees or fewer, but if you make shoes or process tobacco, you can have up to 1,000. And companies in the ammunition or aircraft-building business get a special dispensation: They can have up to 1,500 workers.

For retail operations, total revenue is used as the basis for judging whether a business is small. In general, the maximum size ranges from $7 million (hardware stores) to $30 million (boat stores and electronics shops). But there can be large variations even within the same industry: A shop that sells women’s clothing is considered “small” by the government if it has revenue of less than $25 million, but a jewelry boutique with the same amount of revenue cannot take advantage of the SBA’s small-business services (it must have sales of $14 million or less to qualify).

Such regulations may not matter all that much to jewelry stores, which are unlikely to compete for government contracts. But they can make a big difference to transportation or professional-services companies, which need to fall within the SBA’s guidelines to snag federal contracts set aside for small businesses.

Companies that straddle the line between “small” and “medium-sized” are the ones benefiting most from these new classifications, as it allows them to hang onto their “small” designation even as they build up sizable revenue. Being able to access SBA loans gives them an added advantage when it comes to growth. But the broadened classifications don’t do much for the smallest of the small, the companies that are too little or unproven to qualify for an SBA loan in the first place.

The classifications also are a boon to not-so-small businesses in certain designated industries, most notably defense. While architectural firms or companies that offer administrative office services are no longer considered small if they have more than $7 million in revenue, firms that specialize in naval engineering, military weapons and aerospace equipment can bring in up to $35 million a year and still meet the “small” threshold.

A family farm that nets five figures each year might not have much in common with a defense contractor with tens of millions of dollars in annual revenue. But according to the government, they are both small businesses, even if the more generous guidelines give an advantage to larger companies over tiny startups.

And speaking of tiny, keep in mind that the vast majority of small businesses in the United States have little to no interaction with the SBA at all. According to U.S. Census figures, about three-quarters of all U.S. businesses have no payroll because they are operated by a single person.

Now that’s small.

This article was republished with permission from TheStreet.


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