Article written by BrownWinick 2019 Summer Associate, William "Billy" Daniel, and BrownWinick attorney, Drew Larson
Last year on December 17, the Small Business Runway Extension Act of 2018 was signed into law, amending the Small Business Act. While the Runway Extension Act consists of only two sentences (one saying its name and the other what it does), it will have a large impact on many American businesses. The Runway Extension Act changes the way the U.S. Small Business Administration (SBA) calculates size standards. Currently, most size standards used by the SBA measure a company’s overall receipts. A company can determine their size by calculating an average of its receipts for the past three years and comparing that number to the SBA standard. If the number is below the SBA standard, the company is considered a “small” business; if the number is above the SBA standard, the company is considered a “not-small” business. The Runway Extension Act increases the timeframe for companies’ overall receipts from three years to five years, extending the time period used to calculate a company’s size. This could dramatically impact the growth and business operations of many American companies.
Why is an SBA Size Standard Important?
The SBA size standards are important because they establish which businesses qualify as “small” when determining eligibility for small business assistance programs, including a variety of government contracts available only to eligible small businesses. Most industry size standards are measured using overall receipts, so the Runway Extension Act will affect a wide variety and majority of industries. Many small businesses work these assistance programs into their budgets and projections, often relying on them in the early growth stage. However, the SBA takes a hard line: there are small businesses, and not-small businesses; there is no transition process from one to the other. A small business that relies on SBA programs may find itself no longer eligible, despite its reliance on these programs to grow to that level in the first place. The Runway Extension Act helps ease a company’s transition from a small business to a not-small business by extending the timeframe for calculating the average receipts, thereby keeping lower-receipt years in the calculation for longer.
Practical Effect
By extending the period for calculation of the average receipts, the Runway Extension Act is helping businesses remain small for longer periods of time. Companies in the growth stage now get to look back five years when calculating their average receipts, which will keep less-profitable early years included in the calculation. With the Runway Extension Act, Congress wanted growing small businesses to continue their growth and have more time to transition easily to the open market after exceeding the size standard, rather than becoming not-small too quickly and missing out on important federal assistance. For some, this federal assistance is the reason the company is growing, and without it, that growth might stagnate or even reverse. While a company in decline could see the SBA assistance programs as a way to jumpstart its business again, this new method of calculation may keep it from getting that assistance for at least two more years.
This calculation change has huge ramifications for any company hoping to remain a small business. The SBA is accepting comments through August 23, 2019 about the implementation of the Runway Extension Act; affected companies should make their thoughts known. Companies currently enjoying the benefits of being a small business will rejoice that they may keep that status for a couple more years, while a not-small business in decline may face another couple years before being able to enjoy the benefits of being a small business. Either way, companies should be aware of this change and stay on top of calculation updates to compare with the size standards. The perks of being considered a small business might now be open to companies that had previously just moved beyond the standard.
If you have any questions about this information or how the SBA and its size standards can affect your business, please contact a BrownWinick attorney in the Business and Corporate Law Practice Group.
