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SBA Reconsiders What "Small" Should Mean

Change in U.S. Standards Could Affect Contracts, Loans, Technical Help

By Gwendolyn Bounds
Wall Street Journal
March 22, 2005

What exactly is a small business anyway?

By U.S. government standards, a sheep farmer is one, so long as her business pulls in no more than $750,000 a year. So is a residential remodeler, though he can make up to $28.5 million. A fish and seafood wholesaler gets small status if the company employs fewer than 100 workers while a telecommunications reseller is allowed up to 1,500 employees and can have unlimited revenue.

Such wildly diverging criteria are at the heart of a heated debate among politicians, business owners and advocacy groups about whether existing standards should be modified to make them simpler and less varied. At stake are the billions of dollars in government loan money, contracts and technical assistance that are designated each year for businesses defined as "small."

Currently, size standards vary depending on the industry, and are based on employee count or average annual revenue. Some believe the status quo is fine, while others say the definition of "small" is too generous in certain cases, particularly with nonmanufacturers where the standard is typically 500 or fewer employees for small-business government contract awards.

"In America, 500 employees is not a small business in most industries," says Lloyd Chapman, president of the Petaluma, Calif.-based American Small Business League advocacy group. His group is pushing to have the standard dropped back to 100, where it was in the mid-1980s.

Last summer, the SBA proposed restructuring the size standards, but a backlash of criticism led it to withdraw its proposal. An estimated 34,000 small businesses would instantly have lost their status. The SBA says it remains committed to streamlining size standards and is seeking further public comment on the issue until Sunday. As the deadline approaches, here are some questions and answers:

Why do these standards matter?

Size standards determine whether a business is eligible to participate in SBA programs, including loans, disaster recovery and federal-contract set-asides. Each year, the federal government aims to direct 23% of its spending dollars to small businesses. In fiscal 2003, for example, that would have totaled more than $65 billion.

How do I know if I'm a small business?

The SBA's Web site has a 40-plus-page table of size standards listing requirements for all firm types, from barbershops and nail salons to wineries and computer resellers. For most manufacturers, the standard is 500 employees, though it can go as high as 1,500. In the retail and service industries, however, the benchmark is typically $6 million in revenue, though there are exceptions to that, too. There are 37 different standards.

Why so many?

"Small" is not necessarily the same from industry to industry, the SBA believes. A shipbuilder, for instance, likely needs more people to compete effectively than does a used-car dealer. Conventional wisdom has been that having a revenue-based standard is a more accurate measure of size in some industries.

So what does the SBA want to change?

Among other things, the SBA has proposed streamlining to 10 the number of different size standard levels and eliminating revenue-based size standards. Gary Jackson, the SBA's assistant administrator for size standards, says having so many divergent categories has contributed to problems in contract awards, including businesses qualifying as small for one award and not for another.

When changes were proposed last year, some 4,100 public comments were received. While the majority supported some aspect of the changes, others raised concerns that led to the proposal being withdrawn for more review. The restaurant industry, for one, argued that it would be unduly penalized because its members require a greater number of employees to generate revenue than others and thus need a revenue-based standard.

Members of Congress rebuked the proposed changes as well, partly under pressure from constituents who would have lost their small-business status.

Does this mean the proposal is dead?

No. Through Sunday, the agency is soliciting additional public input about various issues, including how it should define an employee for size standards, whether it should create standards solely for procurement programs, and if a revenue-based benchmark should be used at all. It has also asked whether a "grandfather" provision should be included to cushion businesses losing their status, although Mr. Jackson of the SBA says he hopes one won't be adopted. "If you're small, you're small. If you're not, you're not," he says. So far the agency has received 4,500 comments. The American Small Business League has filed 3,850 of those and is pushing for, among other things, no grandfathering or revenue-based standard.

If I want to know more, or voice an opinion, where do I go?

Go to www.sba.gov/size and click on "What's New in Size Standards." The SBA will also be holding public hearings on the issue around the country later this year.

 
 

 
 

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