What the Government Considers a Small Business

by | Nov 1, 2016 | Insights To Business, Small Business Funding

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What the Government Considers a Small Business

20 years ago a small business was envisioned as being the little deli inside of the local strip mall. This was your family owned business that was offering a specialty service right next door to a grocery store chain.

Today, the picture changes slightly, as we see more small business owners selling their goods over the internet. Certainly the small business concept has changed since the web was first woven, but our perception of it is still the same: a handful of employees and annual sales that are not in the millions of dollar range.

Unfortunately, the government does not have the same perception of a small business that the rest of us do.
The United States’ Small Business Administration (SBA) has stated that any business with 500 employees or less is a small business. In some cases, it may even consider you to be small if you have 1,500 workers. That would seem to be a very large small business if you go by the standard of public opinion.

It’s More than Just the Number of Employees Working for a Small Business

The SBA categorizes businesses, giving certain industries different criteria to meet if they wish to be considered a small business. The categories include, but are not limited to, industries such as:

  • Agricultural
  • Manufacturing
  • Utilities
  • Mining
  • Construction
  • Retail Trade
  • Wholesale Trade
  • Warehousing and Transportation
  • Information
  • Finance and Insurance
  • Real Estate
  • Professional, Technical and Scientific Services

If you look at the criteria to qualify as a small business as a general retailer, you own a small business if you are generating $7.5 million or less in sales a year. Grocers, department stores, appliance stores and used car dealers can sell anywhere from $11 million to $38.5 million annually before they lose their small business status.

In that case, not only does the couple running the corner deli qualify as a small business, so might the large grocer operating right next door to them.

Why Does Size Matter to a Small Business?

The government would like for the (actual) small business owner to feel as though they are being treated with special regard when it comes to qualifying for government endorsed loans or contracts. These standards are put into place so that when your local delicatessen applies for a loan with the SBA, they are given the same consideration and opportunities that the big chain grocer has next door to them. Yet how could that be when the chain grocer is also allowed access to these “special” loans.

What Constitutes a “Real” Small Business

According to US census data, 95% of what the SBA considers a small business are comprised of companies with 9 employees or less. 78% of them are being run by a solo entrepreneur. So why lump the remaining 5% that have a marked difference in the number of employees and annual revenue in the same category? Whatever the reason, it makes it difficult for the “real” small business owner to qualify for a loan through the SBA when he is competing with much larger companies who have a wealth of resources available to use in securing such a loan.

There can be no denying that the financial problems faced by a small business owner with a handful of employees and small annual revenue are vastly different from a business in the same industry who is employing 400 people. Yet, they are given supposed advantage by the SBA when it comes to financing needs.

With this type of disparity in qualifying criteria set forth by the SBA securing a small business loan through them, if you are truly a small business, is as likely as getting one from a bank.

In Fact, You are Still Asking the Bank

If you are applying for a small business loan or working capital loan through the SBA, you are technically dealing with an outside lender. All they do is gather your information and then pass it along to a bank local to you that deals in business loans. Since your request is being lumped together with the “small” business of 400 employees and millions in annual sales, it is not getting the specialized consideration that a real small business lender can offer you.

Solving the Small-Small Business Financial Needs Without the Help of the SBA

The small business owner who needs a quick cash inflow to supplement his working capital does have other options with lenders who understand the needs of a real small business.

For example, if you are operating your small business online, then it is likely that the vast majority of your sales are paid for by credit card. A small business lender may recommend a merchant cash advance in your situation which allows you to pay the money back directly with a percentage of those credit card sales.

On the other hand, you may be a small manufacturing company, with invoices that have terms of 60 days. In order to get the working capital you need to finance your next big order before the last one is paid, the small business lender would suggest factoring. This is a practice where you sell the unpaid invoice to the lender at a small loss. They in turn take responsibility for collecting the payment in exchange for loaning you the working capital.

These are just two of the options that may be offered to you by an alternative lender. The larger small businesses recognized by the SBA would not need to consider options such as these. This is because they have the assets available to use as security for a standard business loan from a bank.

If not for the alternative lender, the way in which the government defines a small business could put a lot of them out of business. Small businesses are unique entities with special needs, and they are the backbone of the American economy. Luckily, alternative lenders recognize this, and commit to helping them stay competitive with their larger counterparts.