What Is a Small Business and Why It Matters

Benefits to Being a Small Business: Loans, Contracts, and Grants

What is a small business? Is a business small because it has only a few employees or because it makes a small amount of profit?

Is it a "mom and pop" grocery store?

Is it an internet company like Instagram that makes millions in profits but has only a few employees?

Why does it matter whether my business is a "small business?"

In this article, we'll look at how businesses are defined as "small" and why being classified as a "small business" has benefits for a business.

How the Small Business Administration Classifies Businesses

The Small Business Administration (SBA) is a federal agency set up to help small businesses in a variety of ways. The SBA defines small businesses in two ways:

1. First, they look at ​the size of the business. In general, the SBA looks at (a) number of employees, and (b) average annual receipts. But, the SBA size standards are complicated, because size is based in part on the industry type of the business. That is, what is a small business for a restaurant is different from a small business in the wholesale industry.

Depending upon the industry, a company can have as many as 1,500 employees (in the tire manufacturing industry, for example) and still be considered "small." While that sounds strange, classifying by industry gives the smaller companies in the industry a better chance.

Size standards are constantly changing, based on inflation and other factors. If you want to check on your size in your industry, you can use this size table.

2. Then they consider other criteria. A business qualifies if it:

  • Is organized for profit
  • Has a place of business in the U.S.
  • Operates primarily within the U.S. or makes a significant contribution to the US economy through payment of taxes or use of American products, materials or labor
  • Is independently owned and operated
  • Is not dominant in its field on a national basis

You'll notice that there's no mention of legal type. So, a small business can be a sole proprietorship, LLC, partnership, or corporation. The criterion of national dominance is a bit fuzzy too.

Why It Matters If You Have a Small Business

Since the aim of the SBA is to help small businesses compete, being qualified as a "small business" can bring several benefits to a company.

Small Business Loans

One of the benefits most discussed is the small business loan programs of the SBA. Actually, these loan programs are misunderstood. The SBA doesn't lend money directly to small businesses. It works with lenders to give guarantees to the lenders, basically acting as a co-signer so the lender has more assurance of being repaid. Only small businesses can get these loan guarantees.

Each of the various SBA loan programs has specific criteria, based on the purpose of the loan and the type and purpose of the loan. Some loans are restricted in size of the loan (micro-loans, for example), while others, like disaster loans, have specific purposes. Other loans are for specific categories of business owners (like Patriot loans for veterans).

Government Contracts

Another major benefit to small businesses from the SBA is the agency's government contract program. Helping small businesses compete for government contracts is a huge benefit to these businesses. Here is where the size standard matters, and why size is based in part on industry.

A small business in a specific industry can compete with the larger businesses in the industry by getting help from the SBA. The SBA has resources to lead you through the process of registering to be a government contractor.

Research and Other Grants

A newer benefit of being classified as a small business is to be eligible for research grants with money set aside in several US government agencies specifically for small businesses. These grants—called SBIR or Small Business Innovation and Research grants—are available from 10 government agencies. The program's goal is to stimulate research. More specifically,

Through a competitive awards-based program, SBIR enables small businesses to explore their technological potential and provides the incentive to profit from its commercialization.

So it does matter that a business can be classified as a small business. Being smaller isn't necessarily a disadvantage; it can mean increased access to loans, grants, and government contracts for your business.  What's the difference between a micro business and a small business?