SBA Proposal Could Push Small Business Lending Into the Middle Market

A small business can grow itself out of federal lending eligibility long before it becomes a large company.

The Small Business Administration is proposing to give some of those firms more room to grow. Its proposed standards would raise revenue and employee limits across dozens of industries, adding an estimated 114,541 businesses to the pool eligible for SBA-backed lending and federal contracting programs.

In an Aug. 20 proposed rule, the SBA laid out a new methodology for determining which firms qualify as small businesses under federal programs. The agency would establish 338 size standards, replacing a system containing nearly 1,000 industry-specific standards and exceptions. The proposal is open for public comments until Sept. 21.

The proposal does not establish a new, all-encompassing definition of a small business. Size limits would continue to differ by industry and would still generally be based on annual receipts or employee counts. What changes is how those limits are calculated and, in many cases, how high a company can grow before crossing them.

The SBA would move from standards generally calculated at the six-digit NAICS level to a combination of broader four- and five-digit industry classifications. It also proposes eliminating maximum thresholds that currently cap revenue-based standards at $47 million and employee-based standards at 1,500 workers.

Those changes can produce much larger limits in individual industries. The SBA has estimated that the proposed employee threshold for semiconductor manufacturing would rise from 1,250 to 2,800, shipbuilding from 1,300 to 2,300 and oil drilling from 1,000 to 2,650. For support activities for animal production, the receipts threshold would rise from $11 million to $71 million.

A Larger Pool of Eligible Businesses

According to the details published in the Federal Register, the number of businesses classified as small under SBA standards would rise from 6,344,967 to 6,459,508, a net increase of 114,541. SBA’s accompanying release describes the change as an increase of more than 110,000 employer firms, or about 1.8% of the nation’s roughly 6.3 million employer businesses.

Small-business status carries practical consequences. Newly qualifying businesses could gain access to federal set-aside contracting opportunities and SBA financing programs. That includes the 7(a), 504 and other SBA loan programs, and the agency specifically says newly qualified businesses and companies retaining eligibility would be able to participate. The immediate change, therefore, would impact who is eligible to seek SBA-backed capital, rather than how much SBA credit will ultimately be extended.

That expanded eligibility could nevertheless matter at precisely the point where SMB growth begins to accelerate.

PYMNTS Intelligence’s SMB Growth Monitor, drawing on 23 surveys conducted from July 2022 through February, found a pronounced size divide. Businesses generating more than $1 million in annual revenue posted average revenue growth of 13.7%, compared with just 0.6% for businesses generating less than $150,000.

The finding suggests that many of the SMBs moving fastest are also the companies most likely to encounter existing size thresholds sooner.

The Emerging Middle-Market Overlap

That becomes particularly relevant when the SBA proposal is viewed alongside PYMNTS Intelligence research on the emerging middle market.

PYMNTS defines that group as businesses with annual revenues of $1 million to $50 million. These companies have moved beyond the smallest-business stage but have not necessarily reached the financing position of large corporations. And they may have outgrown tools commonly used by small businesses while still lacking access to public debt markets or the more flexible financing terms available to larger enterprises.

The SBA proposal does not automatically classify businesses in that $1 million-to-$50 million range as small. Eligibility remains dependent on each company’s industry and applicable employee or revenue standard.

But the two populations can overlap, and the proposal could enlarge that overlap.  At the same time, our data found that speed and flexibility of credit were a widespread concern. Across technology, financial services, goods and logistics, retail and hospitality, and professional services, between 70% and 81% of surveyed companies preferred faster, more flexible credit access to a lower interest rate.

For banks participating in SBA programs, the proposal therefore could widen the addressable group of companies eligible for government-backed lending without requiring those companies to remain at traditional small-business scale. For qualifying businesses, it could lengthen the period during which SBA financing remains one option among a broader set of capital sources.

For a segment where PYMNTS data show growth is already concentrated among larger SMBs, moving that eligibility line further out could give more companies financing options as they make the transition from small business to middle market firm.

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