Check the S.O.P. Q&A

HELP – PLEASE DEFINE “SMALL BUSINESS” BY SBA STANDARDS

Q1. Does the SBA 504 loan program have any business size eligibility requirements?

A1. Yes. To qualify for an SBA 504 loan, the business must be considered “small.”

Q2. What determines if a business is “small”?

A2. The business, together with its affiliates must meet one of the following size standards:

a. It does not have a tangible net worth in excess of $7.5 million and does not have an average net income after tax (excluding any carry-over losses) for the preceding two years in excess of $2.5 million; or
b. It meets the IRS/NAICS standard for the industry in which it is primarily engaged.

The most common alternate standards are:

- Manufacturers – 500 employees
- Wholesalers – 100 employees

Q3. If the small business has a tangible net worth of $5 million but has an average net income of $3 million, is it eligible?

A3. No. The small business has to have a both a tangible net worth of $7.5 million or less and an average net income after taxes of $2.5 million or less (excluding loss carry-forwards); however, the business may still qualify under the alternate size standard listed above.

Q4. If the small business has a net worth of $10 million and an average net income of $100,000, but $9.5 million is "intangibles" including goodwill and trademarks, is this small business small?

A4. Yes. Only tangible net worth is the benchmark. Tangible Net Worth = Net Worth of the company less Intangible Assets (goodwill, trademarks, etc.). In this case, ($10,000,000 - $9,500,000 = $500,000). The Tangible Net Worth is $500,000, which is below the ceiling of $7.5 million and thus the project is eligible.

Q5. What if the small business has a tangible net worth in excess of $7.5 million but has 100 employees and its NAICS Code size limit is 500 employees. Is it "small"?

A5. Yes. It fits the alternative size criteria.

Q6. Are there instances where the small business exceeds both 7(a) and 504 size standards and is still considered "small"?

A6. Possibly. The SBA regulations state that the applicable size standards are increased by 25 percent whenever the applicant agrees to use the assistance within a labor surplus area. Labor surplus areas are listed monthly in the Department of Labor publication called "Area Trends."

Q7. The size standard uses the benchmark of net income after taxes. What if the small business is a subchapter S corporation or a partnership where net income is distributed to individuals for their own tax returns? What do you do if the net income exceeds $2.5 million but is before taxes?

A7. In these situations, you must adjust the net income by the pro rata share of the personal income taxes that were paid because of distributions from the operating company.

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