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“Small” Business Loans Are Larger Than You Think

Of all the common misconceptions surrounding the business loan programs offered by the U.S. Small Business Administration (SBA), one is particularly perplexing: the idea that SBA loans are limited to small amounts of credit for small businesses. Perspectives on this topic vary according to how we define a “small business” or a “small loan.” Still, many would be surprised to learn that despite its name, the SBA works with companies that few would consider miniscule in size.

The SBA supports several different programs that aim to expand credit access for U.S. businesses, but the 7(a) loan guarantee program is by far the largest of these. In 2017, most 7(a) loans guaranteed by the SBA were valued between $350,000 and $2 million, while 35 percent were worth more than $2 million. This proves that SBA loans are not always small.

To qualify for any SBA program, a business must be considered “small” according to the agency’s own methodology. However, a report from the Consumer Financial Protection Bureau (CFPB) argued that even the SBA’s own size standards allow for a wide degree of flexibility in this definition.

How the SBA defines “small” businesses

The SBA considers any firm “small” if it had fewer than 500 employees on average in the last 12 months of operation. This includes full-time roles as well as people who work on a part-time or contract basis. According to this broad classification, 99.9 percent of the nearly 28 million individual firms recognized by the U.S. Census Bureau in its 2012 Census of Business could be considered small businesses. In fact, more than 82 percent of all U.S. firms at the time had no employees other than the owner.

The SBA may also determine the size of a business based on its annual revenue. The CFPB report noted that, in general, businesses with average annual revenue of less than $7.5 million meet the SBA’s criteria for “small” firms. But, as with firm size definitions, according to the number of employees, there is again a great deal of variance. The CFPB report pointed out that this threshold may be higher or lower for firms in different industries or locations. A company operating in the “personal and laundry services subsector,” for example, may be judged as small according to an annual revenue threshold ranging from less than $5.5 million to $38.5 million. And just as with size calculations according to number of employees, most individual businesses operate far below this revenue milestone — 95 percent of companies counted in the 2012 Census of Business made less than $1 million per year on average.

The data on exactly what type of businesses use SBA loans is not always clear, but it does allow for at least one definitive conclusion: SBA loans are not just for small businesses. Speak with the SBA experts at First Business to learn more about how to qualify for an SBA-backed loan, and why it’s important to work with a trusted lender to secure it.

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