Back to Basics: SBA Size Standards Eligibility Under The Paycheck Protection Program (PPP Loan)

KEY TAKEAWAYS 

1. Size standards have been established for most types of economic activity, or industry, generally under the North American Industry Classification System (NAICS).

2. In an effort to achieve the goals of the PPP Loan, the SBA has consolidated all of its applicable size standards, new and old, in an effort to expand eligibility and relief under the CARES Act.

3. Under the PPP Loan, a business is considered “small” if it meets one of the criteria based on three different measurements for size standards: 1) employee-based measurement; 2) revenue-based measurement; or 3) alternative-based measurement.  

Since the passage of the CARES Act on March 27, 2020, the Small Business Administration (“SBA”) and U.S. Treasury Department (“Treasury”) have published an Interim Final Rule for the PPP Loan, Interim Final Rule for Affiliation and several pieces of guidance material, including an FAQ for Borrowers and Lenders. This piecemeal rollout of rules and guidance has created an inconsistent roadmap to navigate the unprecedented intricacies of the PPP Loan. One major component to the PPP Loan that is easily misinterpreted is the rule regarding SBA’s size standards for eligibility, leaving potential relief for countless businesses on the table. This brief client alert is meant to bring some clarity to the issue.

General SBA Size Standards Eligibility

In general, SBA’s size standards govern whether a business is considered “small” and, thus, eligible for a PPP Loan. SBA size standards have been established for most economic activity, or industries, under the North American Industry Classification System (NAICS). You can find the NAICS code for your industry using the online search tool available here. You can also find the size standard for a specific industry at 13 CFR 121.201.

Under general SBA regulations, to be considered “small,” the size of the business alone must not exceed the size standard designated for the industry in which the applicant is primarily engaged. Additionally, affiliation rules apply, and if applicable, the size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher. For more information on affiliation rules, please see our prior client alert published on April 6, 2020: What Counts Towards 500? Employee Calculations and Affiliation Rules Under SBA Regulations.

Expanded SBA Size Standards Eligibility Under PPP Loan

One intent of the PPP Loan is to provide economic relief to as many small businesses affected by COVID-19 as possible. In an effort to achieve this goal, the SBA consolidated all of its applicable size standards, new and old, in an effort to expand eligibility and relief. Under the PPP Loan, the SBA considers a business “small” if it meets the one of the criteria based on three different measurements for size standards: 1) employee-based measurement; 2) revenue-based measurement; or 3) alternative-based measurement. As a result, any business is eligible for a PPP Loan if it meets the criteria on any one of the following size standards: 

Employee-based measurement means: 

• No more than 500 employees; or
• More than 500 employees but less than employee-based threshold established by the NAICS Code for the applicant’s industry (see table).

Revenue-based measurement means: 

• Average annual receipts for last three full fiscal years is less than revenue-based threshold established by the NAICS Code for the applicant’s industry (see table).

Alternative-based measurement means: 

• Maximum tangible net worth of the business is not more than $15 million; and 
• Average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

Conclusion

With eligibility now available under any one of these measurements for size standards, the SBA has expanded access to PPP Loans for many businesses that were otherwise ineligible under previous regulations or the initial interpretation of the Interim Final Rule. If you have specific questions as to your business or would like us to discuss your eligibility further, please do not hesitate to contact us.