SBA size standards: how a NAICS code decides whether you are small

"Small business" is not a vibe. For SBA purposes it is a numeric test, and which test applies to you is decided by a six-digit industry classification code.

Get the code wrong and you can fail a standard you would have passed, or, worse, pass one you should have failed and have it surface later when the file is reviewed.

How the test is built

Each industry in the North American Industry Classification System has an SBA size standard attached to it. The standard is expressed one of two ways:

You do not choose which measure applies. The industry does. The full table lives in the regulation at 13 CFR 121.201, and the SBA runs a lookup tool at sba.gov.

Getting the code right

Your NAICS code is the one that describes your primary activity — where the largest share of revenue comes from — not the one your accountant put on a tax return years ago and not the most flattering one available.

Two traps.

How the numbers are calculated

Receipts are not last year's revenue. They are an average over a multi-year period, calculated using the definition in the regulations — total income plus cost of goods sold as reported to the IRS, with specified exclusions. The averaging period for receipts-based standards was lengthened by statute; use the period defined in the current rule rather than assuming three years.

Employee counts are also averages over a trailing period, and they count everyone: full-time, part-time, temporary, and employees of affiliates. Not full-time equivalents. Heads.

The current averaging periods and the calculation rules are in 13 CFR part 121.

Affiliation is where most people get caught

Your size is not just your size. It includes the receipts or employees of your affiliates.

Affiliation turns on control, and control can be positive or negative, exercised or merely available. Common triggers:

• Common ownership. Another company owned by the same person or people.
• Common management. Shared officers or directors who control both.
• Identity of interest. Family members with businesses in the same or related fields, absent a clear line between them.
• Contractual control. Agreements that give one party the power to direct the other — franchise agreements get looked at for exactly this reason.
• Stock options, convertible instruments and agreements to merge, which are generally treated as though already exercised.

For SBA business loans, affiliation is addressed at 13 CFR 121.301. If you own three businesses, all three sets of numbers are potentially in scope, and an owner who has never thought of them as a group needs to think of them as one now.

The arithmetic, worked

Illustrative only — suppose your code carries a receipts-based standard of $12 million, and your receipts as defined in the regulation over the last five years were $9.2m, $10.4m, $11.8m, $13.1m and $14.9m.

Last year alone is $14.9m, which is over the line. The five-year average is $11.88m, which is under it. On the averaging rule you pass — and an owner who looked only at last year's revenue would have talked themselves out of the programme before making a call.

Now add affiliation. You also control a second company whose receipts averaged $2.1m over the same period. Combined, the average is $13.98m, and you fail.

One calculation, two lessons. The averaging rule is usually more generous than owners expect, and the affiliation rule is usually harsher. Run them in that order, and run both before you spend a week assembling a file.

The alternative size standard for 7(a) and 504

If a business fails its industry standard, there is a second route: an alternative test based on tangible net worth and average net income over a defined period. A business that is too big by receipts can still qualify if it is small by those measures. The current thresholds are set by the SBA and published with the program rules.

This is worth knowing because a growing company that just crossed a receipts threshold is not automatically out of the program. Ask the lender to run the alternative test before you accept a no.

What to do before you spend time on an application

1. Identify your primary activity honestly, and find its NAICS code.
2. Look up the standard for that code and note whether it is receipts or employees.
3. Compute your figure using the averaging rules in the regulation, not a single year.
4. List every business you or your co-owners own or control, and every family-connected business in a related field. Add them in.
5. If you fail, ask whether the alternative size standard applies.
6. If you are close to a line, get the lender's SBA department to look at it before the file goes further. Being marginally over is a reason to structure the request differently, not a reason to hope nobody checks.

Size is one of the small number of things about an SBA loan that is genuinely binary. Everything else can be negotiated with a lender. This cannot.