The Changing Definition of “Small Businesses”

Changing businessTens of thousands of medium-sized businesses have suddenly become small, thanks to regulatory changes, and that means increased competition for federal government contracts reserved for small businesses.

Congress, the Small Business Administration and banks have all recently expanded their definitions of what constitutes a small business.

The SBA has revised its definition of a small business in 130 industries over the past year, shifting some 27,400 businesses from the “other than small” column to the small business column. In many industries, the definition of a small business had remained the same since the 1980s, unadjusted for inflation.

Among the most notable changes, the SBA lifted the revenue limit for small architectural firms from $4.5 million to $7 million. The SBA definition of a small engineering firm leapt from $4.5 million in sales to $14 million. SBA backed government loans more than doubled from $2 million to $5 million.

The SBA has proposed similar changes in other industries including real estate, information and waste management.

Banks have also changed which clients they treat as small businesses. In October, Charlotte-based Bank of America established a single group of consumer banking clients from across the globe that it considers to be small businesses. These clients range from tiny, newly founded companies to established businesses bringing in up to $5 million in revenue annually.

Bank of America representatives said the move is just an administrative change that will not affect its small business lending data. In 2011, Bank of America gave loans totaling $6.4 billion to small businesses, as defined as commercial clients earning under $20 million in revenue annually. That loan total represented a 20 percent increase from 2010.

The definition of a small business is not simply an academic matter. Being counted as a small business can increase its access to capital and allow a company to fly under the radar in regards to certain federal regulations.

Changes to the definition of small businesses are being spurred by the JOBS Act, which Congress passed in March and President Barack Obama is expected to sign in early April. The bill aims to ease the way for investors to put capital into start-up companies, which can then grow and hire new workers more quickly.

The JOBS Act lets private companies have up to 2,000 investors before they must register with the Securities and Exchange Commission. The previous limit restricted companies to having just 500 investors before they had to go public.

As well, the JOBS Act establishes a new designation of “emerging growth companies.” Companies so categorized would not have to comply with regulations regarding large publicly traded companies for up to five years after their first public offering. If its gross revenue were under $1 billion, for example, a company would not have to reveal its executives’ salaries.

Former SEC Commissioner Joseph Grundfest, who also teaches law at Sanford University, told The Wall Street Journal that raising the shareholder limit could help companies stay private when they would other have to go public before they are ready.

Federal dollars and contracts are also at stake in the changing definition of small businesses.

The SBA’s size standards determine which companies may compete for government contracts reserved by federal agencies for small businesses. Federal agencies are supposed to give preference to small businesses in 23 percent of the contracts that they award.

Small business owners who previously completed millions of dollars of work for the federal government told the Washington Post that they could soon be fighting against companies twice their size and that competition could knock them out of the running for future contracts.