A few years ago, SBA changed its size standards. I dutifully advised the industry that both the Industry Size Standard and the Alternative Size Standard had changed. The exec of a large CDC responded, “ We only use the 504 size standard,” which dated him immediately. Time was, 504 and 7(a) loans had different size standards. That ended years ago. Ever since then, SBA has used the “Industry Standard” and the “Alternative Size Standard.” SBA lenders may use either one.

Oh no, not again? Yep. On March 18, 2024. Another change. As before, SBA’s size standards apply to the OC and its affiliates. And the Industry Size Standard and the Alternate Size Standard still apply a twofold test. But the metrics have changed:

Industry Size Standard: 1) The applicant alone (without affiliates) must not exceed the small business size standard for the industry in which the applicant is primarily engaged, and; 2) the applicant, combined with its affiliates, must not exceed the size standard designated for either the primary industry (defined in 13 CFR § 121.107) of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.

What’s a primary industry? SBA considers the distribution of receipts, employees, and costs of doing business among the industries where business operations occurred for the most recently completed fiscal year. SBA may also consider such other factors as the distribution of patents, contract awards, and assets. All that said, using the NAICS on the business tax returns is probably the most efficient way to determine the primary industry

The age-old question: Do we include the EPC in our analysis of size standards? If they’re affiliated then yes, indeed we include them. Reminder: Use the current definition of “affiliation.” Using that, the EPC and the OC may not be affiliates.

SBA calculates annual receipts for both the applicant and its affiliates based on federal tax returns (13 CFR § 121.104). That’s one reason an SBA application must ─ absolutely ─ include business tax returns. The TPL might require a compilation, a review or an audit. Cool: These could contain useful information. But SBA still requires tax returns to determine size standards. And note that we’re dealing with  “annual receipts,” which are on the tax return.

Alternative Size Standard:  The size ceiling is not more than $20 million in tangible net worth and not more than $6.5 million in average net income after federal income taxes (excluding any carryover losses) for the preceding two completed fiscal years for the applicant and its affiliates.

For the Industry Size Standard … Size depends on either annual receipts or the number of employees. These vary. The ceilings are published in the Table of Size Standards 13 CFR § 121.201.

Little-known Fact: If the project is in a Labor Surplus Area, both the Industry Size Standard and the Alternative Size Standard increase by 25% , the “size standard kicker” (50 10 7.1 p. 15).  Labor Surplus Areas are municipalities or counties designated as such by the U.S. Department of Labor, with a new list published every federal fiscal year. If your area is on the LSA List on the date of the SBA application, you may use the kicker. You might remember I wrote several eBulletins about LSA’s last fall. Refresh your memory? They’re archived on the JRB website.1

Wrapping up. Now, I’ve summarized what SBA says about size standards. And there’s a bunch more in the CFR. From where I sit, I think some university should offer a graduate degree in SBA Size Standards. Until then, for more information email me or Contact JRB.

Richard Jeffrey
Senior Associate, CDC/504 Program

1 JRB eBulletins are archived on the JRB website by month and year. To access, go to eBulletins, scroll to Archives, then Archive Library and enter the year and month from the drop-down. Every eBulletin issued in a given month/year will pop up. Was your favorite issued in May of last year? Not quite? Pick a different date.