Is Your Business “Small”? SBA Size Qualifications and Guidelines
As the federal government agency that’s designated to serve small businesses, the U.S. Small Business Administration (SBA) adheres to specific size standards to determine eligibility for its loan programs. Even still, these size standards are quite generous, which means that more businesses can qualify for the SBA’s advantageous loan programs.
Here, we take a look at size-qualification standards for one of the SBA’s most popular loan programs, the 504 program. This loan option is great when businesses need funding to:
- acquire, renovate or otherwise improve real estate
- purchase major equipment
- refinance debt related to the business
Size requirements basics for the SBA 504 program
When determining whether your business client meets the SBA’s size criteria, the first thing to know is that the applicant business owner and any affiliated businesses are considered on a combined basis. That means that if your applicant business owner also has ownership in other entities, the size of those entities will likely be added to the applicant business when determining eligibility.
Options to help your business meet the size standards
The SBA offers two different options that can be used to help meet the size-qualification criteria. Either can be used to determine whether your business meets the definition for “small” when you apply for a 504 loan, and applicants are only required to meet one of the two standards.
1. The 504 Size Standard
The 504 Size Standard option looks at business financials. It includes a review of the net worth and net profit for the applicant (and, if applicable, its affiliates). To meet this size standard:
- The applicant’s net worth must be under $15 million and the business’s average annual net profit, averaged over the last two years of business, must be under $5 million. To verify this, the SBA reviews tax returns as part of the application process.
- If the applicant business owner’s (and affiliates’) assets include real estate, the SBA considers the cost value of the properties, not the market value, which typically works in the applicant’s favor.
- The overall net-worth calculation is based on tangible net worth, and intangible business assets, (such as goodwill) are deducted from the total net worth calculation.
2. The 7(a) Size Standard
Despite its name (which refers to another SBA loan program), the 7(a) Size Standard is also a valid measure for 504 loan eligibility. This option uses a comparison of the applicant business owner’s (and, if applicable, its affiliates’) revenues or number of employees, based on industry-specific guidelines.
- For applicants to the 504 program, this option is generally used when the applicant’s net profits and net worth exceed the 504 Size Standard.
- This size standard compares industry-specific benchmarks, such as revenue or number of employees, against corresponding measures for the applicant business and its affiliates.
- The SBA provides a list of industry benchmarks from the North American Industry Classification System (NAICS) and the applicant’s business type determines which benchmarks are used. For example, NAICS uses a size standard of annual revenue below $8 million for a full-service restaurant, while the size standard for manufacturers is based on the number of employees.
Most small businesses qualify as “small” for SBA loans
The majority of small businesses will meet the SBA’s size standards and qualify for SBA loans, which can provide the financial support needed to help you grow and succeed.
If you’d like to learn more, have questions about whether your business qualifies or want to explore SBA funding options, contact us today.