To qualify for a SBA loan, a business must fit in the government’s category of “small.”  The SBA doesn’t want to help a business gain an unfair competitive advantage.  They also don’t want to help businesses large enough to help themselves.  So the SBA has set up a way to determine if a business fits under the maximum “size standard.”

Affiliated Businesses

Before considering these rules, you must understand the concept of affiliation.  Businesses that share common owners give us one example.  If someone owns at least 20% of two different businesses, those two businesses are considered affiliates.

There are also subjective standards that can turn two businesses into affiliates.  For example, if one business can control another, the SBA rules them to be affiliates.  If you have one customer or one contract, a lender may conclude that other company has the power to control your destiny.  Certain franchisors control so much of their franchisees businesses that the SBA considers them affiliates. Affiliation can also be created by sharing management, merger agreements, contracts and joint ventures.

Perhaps you guessed why we explained about affiliates here.  When determining if your business is small, the SBA adds together all your affiliated businesses.  This includes all domestic and foreign companies.  

Each type of business has its own size standard.  A cluster of affiliated companies must be judged by the size standard for the “primary” industry.

7A and 504 Loans Have Different Size Standards

The maximum size limitation depends on which of the two SBA loan program you use.  The standard is different for 504 loans than for 7a loans.

SBA 504 Loans

If you choose a 504 loan, the SBA will evaluate two different financial benchmarks.  A business must be under both standards. 

1.    The combined tangible net worth of all the affiliated businesses must be less than $15,000,000.   Note that the net worth calculation only considers the businesses.  It has nothing to do with personal net worth.

2.    The combined annual income must be under $5,000,000.  The exact SBA definition evaluates the “average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years.”

Alternatively, if you do not meet both of the standards above, but you would qualify based on the SBA 7a loan size standards, you are eligible for a 504 loan.

SBA 7a Loans

Unfortunately, it takes a bit more work to determine the maximum size standards for 7a loans.  Every industry has a different measurement.  The SBA follows the North American Industry Classification System (NAICS) code system to determine each business’s industry.  A size standard has been assigned for each NAICS code. 

Depending on the industry, the SBA bases size standards either on the number of employees or on the gross sales volume.  Most businesses in the same general industry have the same size standard, but certain businesses are exceptions.  So you will need to look up the size standard for your NAICS code to be sure of your standard.

Here are the broad category size standards:

• Most manufacturing businesses must have less than 500 employees.
• Most wholesale businesses must have less than 100 employees.
• Most retail businesses must have less than $6,500,000 in annual gross sales, averaged over the last three fiscal years.

You can look up each size standard on the SBA web site.  Here is a link to the SBA Size Standards page:  SBA 7a Size Standards.