What defines a small business? Feds propose changes, but business leaders are wary

Fort Worth city and chamber officials are voicing concern over proposed changes to the definition of small business by the federal government. 

The changes affect how the federal government determines which businesses qualify as “small” relative to eligibility for certain federal programs. In general, the new regulations would replace almost 1,000 business size categories with 338 broader ones and raise the maximum numbers of employees and maximum revenue allowed in the “small business” definitions. 

Government and civic leaders are concerned that the proposed changes would force smaller firms to compete with what are now considered mid-sized firms. 

“We are very concerned about the impact these proposals could have on the genuinely small businesses the SBA was created to serve. This risks undermining the fundamental purpose of the SBA,” said Steve Montgomery, Fort Worth Chamber president and CEO. 

The proposal was submitted by the U.S. Small Business Administration in August. In a news release, the SBA said the changes will make the system easier to navigate and reduce the loss of federal preferences that firms experience if they exceed their size threshold.

Stakeholders can submit comments online on the proposal until Nov. 20. 

Fort Worth City Council members received a briefing on the issue during a work session Oct. 27. 

District 6 council member Mia Hall led discussions about how Fort Worth would respond to the federal government’s proposed changes. 

“I definitely would like to protect the sanctity of what we are defining as a small business now, and keep the eligibility of those who are already struggling with some of our processes,” she said. 

Hall said she disagreed with the proposed changes. 

“I would, of course, always want to engage with our chambers and the community and get feedback on that, but I am not of the mind that we should … redefine what small is, let’s just say that. And, this is very generous and broad on what we’re calling small in most categories.”

The city could set its own size standards for local government contracts, Hall said. 

The size standard changes would impact several of Fort Worth’s key industries, including defense, construction, manufacturing and IT industries, according to documents published on the Federal Registry. 

New classifications will increase small businesses by 2%, growing the number of businesses with access to federal contracts, subsidized financing and regulatory burden protections from 6.3 million to an estimated 6.5 million. 

The increased competition from an estimated 110,000 to 114,541 mid-sized and larger firms are expected to squeeze around 200 companies out of eligibility for set-aside contracts, especially those nearing the new size standards, and lead to reduced profits, according to SBA documents. 

During a Manufacturing Day event in White Settlement in October, Rep. Marc Veasey, D-Fort Worth, said he didn’t agree with the administration’s sizing decisions, though he placed importance on supporting both small and mid-size businesses. He said the proposed thresholds would force the smallest of businesses to compete against companies with much larger employee bases. 

“I know businesses that exist like that, but they have many, many more resources than someone who may have a business out here in White Settlement and they want to have seven people working there,” Veasey said. 

Montgomery felt the same way. 

“A local company with 25, 50 or 100 employees should not have to compete for small business opportunities against companies with thousands of employees,” he said. 

The new three-factor methodology, focused on national industry size, number of geographical markets and average market size, includes an updated formula for calculating size standards and a monetary adjustment based on inflation. 

Federal officials said in official documents and in a September news release that the new rules better reflect current economic conditions, market structures and “the realities faced by growing businesses” and the number of firms “fluctuating between small and other than small.”

Key elements of the proposed SBA changes to small business definition 

• Consolidation of classifications: Reduces nearly 1,000 industry classifications down to 338 broader industry groups.
• Shift to employee-based limits: The new rules would define small businesses more by the number of employees rather than receipts-based limits. 
• Increase in both revenue and employee-based limits: Existing revenue- and employee-based limits would see dramatic increases, ranging from over 200% to more than 1,400% in fields like tech and management consulting.
• Impact on number of small businesses: The SBA estimates the changes will qualify an additional 110,000 to 114,500 midsize firms as small businesses, expanding access to federal contracting set-asides and SBA loans. 

Comment period: The public comment deadline was extended through Nov. 20. To comment, go here.

Still, operators of small businesses worry about the scope of the proposed changes and the speed of implementation. The Fort Worth Chamber found through previous surveys that most small businesses in Fort Worth opposed new definitions by an 8-to-1 ratio and feared losing ground to larger firms. 

“A bigger definition isn’t necessarily better for small businesses, and these changes could dilute the limited opportunities and resources that small, genuinely small businesses, depend on,” Montgomery said. 

Respondents to the Fort Worth Chamber’s survey said their biggest concern was increased competition for set-aside contracts, or federal procurement opportunities reserved for small businesses or disadvantaged groups. Seven respondents said they worried most about subcontracting risks if primes become “small.” 

Small business respondents said they completely opposed the new rule or preferred a smaller increase of employees than the federal government proposed. Only 4% supported the proposal as is. 

Montgomery said smaller businesses do not always benefit from a bigger definition and the changes could limit the opportunities and resources genuinely small businesses depend on.

“Given the importance of small business to our local, state and national economies, a central mission of the Fort Worth Chamber is to be a fierce advocate for small business,” Montgomery said. “Many local small business owners and operators in our community have expressed to us serious concerns about the negative impact these proposed rules could have on both their growth potential (and) their very sustainability.”

Rebecca Heliot is a freelance reporter who previously served as a business reporter for The Oklahoman. She specializes in general assignment business reporting, features and breaking news. Her work has been published in The Oklahoman, USA Today, Community Impact, Houston Chronicle and more. Contact her at [email protected]. 

Disclosure: Hillwood is a contributor to the Fort Worth Report. At the Fort Worth Report, news decisions are made independently of our board members and financial supporters. Read more about our editorial independence policy here.