SBA makes small businesses bigger (the easy way)

October 11, 2010 by

The enlarging of small business has begun.

On Wednesday, the Small Business Administration published a final rule revising upward the size standards that determine eligibility for S.B.A. programs in three broad sectors of the economy. And that is good news for nearly 18,000 businesses that until now have been unable to take a government-backed loan or to get assistance winning federal contracts. But it makes the term “small business” a little more ambiguous.

S.B.A. size standards vary by industry (as enumerated in the North American Industry Classification System). Generally, caps are set based either on number of employees or average annual receipts, a system that was put in place in 1984. Apart from occasional inflation adjustments and other tweaks, the standards have remained largely the same since then. The changes announced this week, for the retail, accommodation and food service, and “other services” sectors, are the first to result from what the agency calls the first “comprehensive review” of size standards in nearly 30 years.

For the most part, industry size standards now set at $7 million in average annual receipts will be doubled or more, in some cases increasing to $30 million or $35.5 million. But these are not nearly as drastic as the adjustment made for new car dealers. Initially, the S.B.A. proposed raising the maximum receipts to $30 million, from $29 million, or, alternatively, setting the maximum level of employees at 100. But after lobbying from the National Automobile Dealers Association, the S.B.A. adopted a standard that defines dealers with up to 200 employees as small.

According to the S.B.A., nearly a third of those 18,000 companies, scattered across 70 industries, soon to fall under the small-business rubric are new-car dealers. Figures from the Census Bureau indicate that 83 percent to 93 percent — and probably closer to 93 percent — of all new-car dealerships will now be considered small. Moreover, the largest of those now-small firms will have annual revenue of around $120 million.

An S.B.A. spokesman, Jonathan Swain, said senior agency officials were not immediately available to discuss whether, or why, auto dealers had been singled out by the new policy. However, since the Obama administration effectively nationalized much of the General Motors and Chrysler last year, it has used the S.B.A. to alleviate the suffering of the politically powerful car dealer industry, even as it simultaneously pushed G.M. and Chrysler to shutter many of their dealers.

In May 2009, the S.B.A. created an alternative size standard for the purposes of getting a government-backed loan, in effect through last month. The alternative — which replaced the average revenue or headcount threshold with a maximum net worth of up to $8.5 million, combined with a net income capped at $3 million — was not specifically aimed at auto dealers, administration officials said at the time. However, they pointed out that relaxing the rule would increase the share of all new car dealers eligible for an S.B.A-backed loaned from 25 to 50 percent. A few weeks later, the agency announced a new, also temporary, “floor plan financing” program specifically devised to allow hard-pressed vehicle dealers to use the agency’s general business loans to finance inventory.

Andy Koblenz, the dealer association’s vice president of legal and regulatory affairs, defended the new size standard. “The top line revenue is not relevant because of the nature of the products,” he said. “If you’re selling books, or you’re selling clothing or you’re selling cars, the businesses are comparably sized in terms of physical plant, sales staff and management structure.” According to the association, the average pretax profit margin for its members has hovered around 1.5 percent in recent years, among the lowest margins of any American industry that’s turning a profit (on average, a dealer with $120 million in revenue would earn a taxable income of $1.8 million).

The new size standards take effect on Nov. 5. Meanwhile, the recently enacted small-business jobs bill directed the S.B.A. to put into effect another, still more generous, temporary alternative size standard for S.B.A. loans to supersede the expiring standard put in place in May 2009. Under the new law, the cap on net worth was raised to $15 million and the limit on income bumped to $5 million. On Friday, the S.B.A. announced that it had enacted the new standard.

Political pressures inexorably push up small-business size definitions. That, at least, is the theory of Jonathan Bean, author of a history of the S.B.A. provocatively titled “Big Government and Affirmative Action.” As the name suggests, this is not exactly a work of scholarship; it’s a polemic offered by an ideologue staunchly opposed to any S.B.A.-style intervention in supposedly free markets. Nonetheless, the events of the last several weeks suggest Mr. Bean has a point.

The pressure comes not just from Congress. In fact, in each of the three sectors the S.B.A. analyzed in its own review, the agency found many industries where the data suggested actually reducing size standards. But in each instance, it declined to do so. “S.B.A. believes that lowering size standard for those industries would not be in the best interests of small businesses when the economy is in a deep recession,” the agency wrote when it proposed these rules in October 2009.

Nor, apparently, is it in their interests after the economy exits recession. “Further,” the agency continued, “S.B.A. does not anticipate that it will propose to lower size standards after the Recovery Act terminates on September 30, 2010. S.B.A. intends for the proposed size standards, if adopted, to remain in effect unless and until it receives information or data that suggests a change is needed.”

In other words, we are all small businesses now.

– by Robb Mandelbaum, New York Times – Oct. 9, 2010

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