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June 17, 2014

How 8,500 large companies will become small businesses overnight

When the clock strikes midnight on Sunday, July 13, thousands of relatively large companies will — poof — suddenly become small businesses.

It's not magic. It's just the federal government at work.

The Small Business Administration has announced plans to update the size standards used to determine which firms are eligible for the federal government's small-business lending and contracting programs. Coming on the heels of series of tweaks to individual industries over the past few years, this will be the first broad update based on inflation the department has made since 2008.

In some industries, the cutoff is measured in total number of employees. In others, it is measured in terms of a company's total assets or annual revenue. In this case, the updates will apply to nearly 500 sectors for which sales or assets are the standard.

Under the new caps, which take effect July 14, the agency estimates that roughly 8,500 additional companies will be considered a small business by the federal government.

Others might not consider them that way.

For example, after the update, a travel agency or a locksmith would qualify as small if they have annual revenues of less than $20.5 million, up from $19 million. A family clothing store or software publisher, meanwhile, could soon bring in up to $38.5 million a year and still apply for small business support.

This sweeping update comes after the agency has made a number of smaller changes to various sectors; namely those for which the department instead uses employee count to determine eligibility. As a result, certain sectors, like telecommunications and air travel, now have a small-business threshold of 1,500 workers.

In a recent column, Chuck Blakerman, an author and entrepreneur, called those size limits "absurd" and described the past five years as "the largest expansion of the definition of 'small' in the 61-year history of the SBA."

"Their small isn't our small," he added.

Members of Congress have taken similar issue with the agency's perceived expansion of the type and size of business the agency supports. In multiple hearings before the House Small Business Committee, the agency has been criticized for what some lawmakers worry is a shift away from helping mom-and-pop businesses to instead support mid-sized firms.

But the agency hasn't backed down, insisting, in part, that companies in certain sectors have to compete with multibillion-dollar corporations. In that case, a company with merely tens of millions of dollars in sales warrants small-business support.

In addition, SBA officials argue in the text of the rule that the changes will allow some firms that have lost access to contract set-asides or loan programs due to inflation to regain their status. Others that are about to eclipse the limit for their industry will also be able continue taking advantage of those programs.

Moreover, the agency added, "federal agencies will have a larger pool of small businesses from which to draw for their small business procurement programs." Heightened competition, they say, will help drive down prices and lead to a better return for taxpayers.

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