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NOVEMBER 17, 1999


Are You Small Enough for the SBA?
Classifying companies differently will make some ineligible for agency programs

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The Small Business Administration plans to change the way it classifies small businesses, and for a small number of companies, that will mean a bracing change in the way they do business with the government.

The reclassification has two aspects. First, starting on Oct. 1, 2000 (the start of the government's fiscal year 2001), the SBA intends to abandon the use of the 60-year-old Standard Industrial Classification (SIC) codes to categorize businesses. It will switch to the newer, more comprehensive North American Industry Classification (NAIC) codes, developed in the early 1990s as a result of the North American Free Trade Agreement. Each number identifies an industry or subsector of an industry. Canada, Mexico, and the U.S. have all agreed to use the same codes and definitions to track trade flows between the three countries more accurately.

The SBA's second classification move is more important for small businesses. The SBA assigns subcategories for each code based on revenue and number of employees. Next year, those cutoff points will change, too. That matters because the SBA uses them determine which small businesses in each sector qualify for its guaranteed loans and preference programs in bidding on federal contracts. Under the SBA's new classifications, a few companies will be considered too large to qualify for the agency's programs and others will have to compete against larger companies for federal contracts.

DON'T BE SHOCKED. The change won't cut a large swath through small business. It will probably only affect 1% of the 40,000 to 50,000 companies that qualify for financial assistance or procurement contracts annually, says the SBA. "We think, on balance, the number of firms that qualify now will be roughly the same as after that conversion," contends Gary Jackson, SBA's assistant administrator for size standards.

Nevertheless, Jackson recommends that all businesses look at the proposed rule changes to see what their new NAIC codes will be and to find out if they still qualify for SBA programs ( Interested parties may file comments until Dec. 21, 1999.

The programs that will be most affected by code changes are the ones that give disadvantaged businesses an assist in bidding for federal contracts, including the section 8A program, which reserves a certain number of government contracts specifically for minority-owned businesses. The SBA says companies that apply for these are likely to be affected more than those applying for loans, because companies of varying sizes compete for government contracts whereas only the smallest companies tend to apply for SBA loans.

In some cases, companies that bid on government contracts may face bigger competitors because of the reclassification. "They should know they will face a little bit more competition on certain government contracts and not be shocked when they bid on a contract," says Jackson.

TOUGH BREAK? Here's how the changeover will affect three industries. The SBA determined that the SIC and NAIC definitions of "legal services" are similar enough. So the agency won't change the revenue cap of $5 million for law firms seeking loans or bidding to provide services to the government. Casting companies, on the other hand, are currently classified as part of the motion-picture industry under the SIC codes, and companies with revenues of up to $21.5 million can apply for loans or procurement contracts from the SBA. But NAIC redefines casting services as temporary-help agencies, which will put SBA programs out of reach for those with more than $5 million in revenues. Tough break for casting companies? Probably not, says Jackson, because in that industry, companies with annual revenues of more than $5 million probably wouldn't need SBA assistance anyway. At the other end of the spectrum, service stations with revenues of $20 million would now qualify as small businesses. Before, the cutoff was $6.5 million. Of course, that's bad news if you own a $3 million-a-year station — you'll be bidding against "small businesses" with $20 million in revenues for government contracts.

Business owners shouldn't panic. The changes won't affect them until their contracts or loans come up for renewal. Still, it might not be a bad idea to find out where you fit in now — before you bank on that assist from Uncle Sam.

By Jeremy Quittner in New York

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