For many people, the true definition of a small business may not be important. However, if you are seeking financing, understanding how small business are classified is very important.
The definition that is most often used to determine if an organization can be classified as a small business comes from the Small Business Administration. The SBA has produced size standards for all industries that determines in terms of dollars and/or employees if a company can be considered a small business. This is important because being able to call yourself a small business can make you eligable for special grants and loans through lending companies and the federal government.
The following chart, from the Small Business Administration, provides a quick synopsis to classifying companies as a small business:
Industry Size Standard
Manufacturing 500 employees
Wholesale Trade 100 employees
Agriculture $750,000
Retail Trade $6 million
General & Heavy Construction $28.5 million
Dredging $17 million
Special Trade Contractors $12 million
Travel Agencies $3 million
Business & Personal Services $6 million
Agricultural, mapping, etc. $4 million
Dry Cleaning & Carpet Cleaning $4 million
As you can see, the determination of a small business can vary widely depending on the industry. However, for most service-oriented companies, having under $4 - $6 million a year in revenue will classify you as a small business. Manufacturing operations are usually consider small if they have fewer than 500 employees. And for agricultural services, having less than $750,000 a year in revenue classifies the operation as a small business. Because most family farms are small businesses, it is easy to see how much money many family farms actually generate every year. It is also easy to see why so many family farms rely on this distinction to qualify for special programs.
In addition to the size classifications from the Small Business Administration, there can be other guidelines that are used to judge how to classify a business. For finance purposes, many banks and lending institutions see businesses that have been established less than 2 years as a higher credit risk. Typically, businesses in operation less than 2 years have to rely on the credit history of the owners or incorporators in order to gain financing. In addition, some institutions prefer for a company to have $20 million a year in revenue in order to qualify for large loans and special loan terms.
Many people may not see any of this as very important. However, if you are a small business that is seeking financing, either through grants or loans, then these issues can be very important. In addition, if you have a company that falls into one of these categories, it could be worth checking into the programs that are available to you. Every year, businesses use the special programs and loans available to small businesses to enhance and build their operations.
Understanding small business classifications and where your business falls could be a very important piece of information to the future of your business.
