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SBA Loans Opened to More Businesses: How SBA Size Limits Work

The SBA announced that it would expand access to the most common type of federally guaranteed small business loans, its 7(a) loan program. The change will allow access to 7(a) loans for some businesses previously excluded due to having too much in annual sales. The temporary change is a good time to look at how SBA size limits work.

As reported by Reuters, the SBA announced that from now through September 30, 2010, there will be an alternative size limit for prospective SBA backed 7(a) loan applicants. The rule is widely reported as a way to open SBA 7(a) loans to struggling auto dealerships. Under the temporary alternative size limit, businesses previously ineligible for having too much in annual sales will be eligible if their net worth (including subsidiaries and affiliates) is less than $8.5 million and average net income over the last two fiscal years is less than $3 million. These are the limits currently in place for SBA backed 504 loans.

The SBA’s press release claimed the move would open 7(a) loans to an additional 70,000 businesses. It also stated that such temporary increases in size limits worked effectively in 1993 to counter the early 1990’s recession and in 2005 to combat Hurricane Katrina’s effect on small businesses.

Talk of who would best benefit from small business loans and who can get them makes it a good time to look at how the SBA’s size limitations work.

The SBA specifies different size limits for different types of businesses. The categories of businesses match the North American Industry Classification System with some slight modifications.

The size limits for a specific type of business is normally either a certain number of employees or a certain amount in average annual receipts. For example, a house slipper manufacturer meets the size guidelines if it has 500 or fewer employees (computed on average). A potato farmer, on the other hand, no matter how many employees, satisfies the SBA size limit as long as average annual sales don’t exceed $0.75 million. Here is the table of size limits for different industries, but note that it does not yet reflect the new changes.

Normally, a new car dealer is limited to $29 million in annual sales. As the Wall Street Journal’s Independent Street pointed out in the lead-up to the new rule, this excluded most auto dealerships, who average $40 - $45 million in annual sales. With the temporarily raised size limits, high sales businesses such as auto dealerships, which also have considerable costs might explore SBA backed 7(a) loans as long as their net worth is below $8.5 million and average annual net income is below $3 million. And of course, assuming they can find willing lenders.