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Does Your Business Fit the SBA’s Small Business Definition?

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If you own a small business and don’t want to use all of the money in your business savings account to fund its growth, you should consider other funding options, like an SBA loan. To qualify, your business would have to meet the SBA’s small business definition requirements. Currently, to fit the SBA’s definition of a small business, your revenue would have to be between $1 million to $41.5 million, depending on your industry, and you can employ anywhere from 100 to 1,500 employees.

How the SBA defines ‘small business’

2021 SBA small business definition*
Revenue limits: $1 million to $41.5 million
Number of employees: 100 to 1,500 employees

*Varies by industry

The most important factors determining whether or not a business meets the SBA’s definition for “small” are the company’s industry, revenue and number of employees. The SBA provides a lengthy table describing employee and revenue limits for each industry, organized by NAICS code. Since the SBA reviews the size standards every five years, they are subject to change.

Which employees count?

All workers, including those employed on a full-time, part-time and temporary basis, contribute to your overall employee count. If you acquired another business, employees from that business would also contribute to your total. The SBA takes an employee count on a 12-month basis, or counts employees for each pay period if you have not yet been in business for a full year.

Why does the SBA’s ‘small’ definition matter?

Certain government contracts and loan programs from the SBA are reserved for small businesses. To ensure the right companies receive these opportunities — including the relatively low interest rates that come with its loan programs — the SBA enforces eligibility requirements. If your company doesn’t match these small business definition criteria outlined by the SBA, you won’t qualify for those contracts or programs.

Furthermore, the SBA requires that small businesses also meet the following requirements to be eligible for funding:

  • For-profit, officially registered and operating legally
  • Physically located in the U.S. and operating in the U.S. or its territories
  • Invested equity from the business owner
  • Sound business purpose
  • Ability to repay any debt

Types of SBA funding for small businesses

Businesses that meet the SBA’s small business definition and other small business qualifications can apply for SBA loan programs and federal contracting assistance. Your small business could be eligible for the following SBA-backed loans:

7(a) loan program: The SBA’s most popular program provides general-purpose loans for small business owners. You could borrow up to $5 million with repayment terms up to 25 years. Specialty loans within the 7(a) programs are available for certain needs like smaller loan amounts, export working capital or express time to funding.

CDC/504 loan program: Small businesses looking to acquire fixed assets — such as buildings, land or machinery — can borrow funds to finance their purchase. The maximum amount a business can borrow is $5 million for large assets that expand the business and create job opportunities. (Energy-efficient and manufacturing projects, as well as commercial real estate purchases, may qualify for up to $5.5 million.)

These loans are only available by using a Certified Development Company (CDC): Typically, the CDC provides up to 40% of the loan and a lender covers 50%. The business owner contributes the remaining 10%. The assets being purchased serves as collateral on the loan.

Microloan program: For smaller funding needs, the SBA microloan program provides up to $50,000 to small businesses that have trouble qualifying for traditional business loans. Repayment terms for microloans typically max out at six years. SBA microloans are generally targeted at women, low-income, veteran and minority business owners.

8(a) Business Development program: The SBA limits competition for certain government contracts to small businesses that participate in the 8(a) program. The goal is to help disadvantaged businesses win valuable contracts. To be eligible for the program, an owner who is economically or socially disadvantaged must control at least 51% of the business. The owner must also have a personal net worth of $750,000 or less, $6 million or less in assets or $350,000 or less in average adjusted gross income for three years. In addition, business owners must show good character and potential to successfully perform.

If approved for the 8(a) program, you could compete with similar businesses for set-aside or sole-source contracts — contracts federal agencies reserve for small businesses. You could also receive assistance such as business training, counseling or marketing help from a mentor who is also participating in the program.

Other benefits of meeting the SBA’s small business size standards

SBA-approved small businesses could have access to additional assistance, most notably resources set aside for women and veteran entrepreneurs.

Women-owned businesses: The SBA’s Women-Owned Small Businesses Federal Contracting program reserves federal contracts for qualified women-owned businesses. It’s like the 8(a) program, but specifically designed to give women entrepreneurs increased access to federal contracts.

The federal government has set a goal to award 5% of all contracting dollars for women-owned small businesses annually.

To become eligible, your business must:

  • Meet the SBA’s small business definition guideline
  • Be controlled by a woman who has at least 51% ownership
  • Have women manage daily operations and make long-term business decisions

Organizations like the National Women’s Business Council and the Association of Women’s Business Centers also provide resources and opportunities for women-owned small businesses through partnerships with the SBA. To access resources for women-owned small businesses, you would need to receive certification from the SBA. You can apply for certification on the SBA’s website.

Veteran-owned businesses: Eligible veteran-owned small businesses could also access training programs and specialized loans through the SBA Office of Veterans Business Development. Programs like Boots to Business and the Veteran Federal Procurement Entrepreneurship Training Program teach veterans the skills to successfully run a small business.

However, becoming certified for these programs could be a lengthy process. The SBA would ask you to submit information about your business, such as organizing documents, past financial statements and a business plan, as well as personal information like income statements and proof of citizenship.

As an SBA small business, you may be able to qualify for government-sponsored business grant programs as well. Both the Small Business Innovation Research Program and Small Business Technology Transfer Program are tied to the SBA, and grant recipients would likely need to meet SBA size standards.

The bottom line

If your company meets the SBA’s small business definition, including the size standard and other qualifications, then you might be able to take advantage of a variety of federal loan and contracting programs to help your business grow and succeed. Spend some time reviewing the small business qualifications so you don’t miss out on any opportunity to improve your business, profitability, and viability.

To get help with additional questions you may have, contact your local small business development center.

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How Tariffs Affect Small Businesses

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Tariffs are a special type of tax charged only on imported goods. When we think about the effects of tariffs, we are usually concerned about who ends up paying the bill: producers abroad or consumers and small businesses at home? Tariffs can force small businesses who rely on foreign suppliers to raise the prices on their products or seek out alternative sources.

Below we discuss how other ways tariffs are affecting small businesses and how you can protect your firm when unexpected costs threaten growth.

What is a tariff?

A tariff is a tax that a country levies on imported goods and services. Companies that pay those tariffs to bring goods into the country likely pass on that cost to customers. Because tariffs increase the price of imports, those goods may appear less desirable to budget-conscious consumers. As a result, they may choose to buy cheaper domestic goods and services.

“As foreign manufacturers of goods can pass along all or most of the costs to American firms or consumers, even the most well-intended tariff may counterintuitively raise costs on those it was designed to protect,” says Krieg Tidemann, Niagara University assistant professor of economics.

A tariff is typically charged as a percentage of the value of the product that a buyer must pay a foreign exporter. In the U.S., importers must pay tariffs at 328 ports of entry, which the U.S. Customs and Border Protection controls. The paid tariff goes to the Department of the Treasury and makes up a portion of the federal government’s revenue.

Trade wars and tariff increases

A country may introduce a new tariff or increase existing ones to restrict trade from particular countries or reduce imports of specific types of products. In retaliation, affected countries may decide to levy their own tariffs, which leads to a trade war.

In 2018, the U.S. Chamber of Commerce implemented a 25% tariff on steel and a 10% tariff on aluminum under the national security provisions of the Trade Expansion Act. In response, affected countries retaliated with duties on an estimated $43 billion of U.S. export products, ranging from motorcycles to alcoholic spirits.

In 2021, the U.S. and the E.U. agreed to suspend all tariffs on $11.5 billion of goods for five years. This move was made after agreeing to a truce in their 17-year trade dispute over U.S. subsidies for Boeing and E.U. subsidies for Airbus aircraft. What this means is small American businesses like bourbon makers in Kentucky, for example, can now freely export to the E.U., said Davidson College associate economics professor Shyam Gouri Suresh. “It looks like this suspension might continue indefinitely as the U.S. and E.U. see improved trade relations. As a result, U.S. firms will see more customers from abroad and businesses will get more sales.”

On June 15, 2021, President Biden stated that the U.S. and the E.U. would “work together to challenge and counter China’s non-market practices in this sector that give China’s companies an unfair advantage.” While trade talks are continuing between the United States and China as of press time, at least $370 billion worth of Chinese imports face tariffs, some as high as 25%. “It is likely that many of these tariffs will continue under President Biden,” said Gouri Suresh. “The Biden administration sees China as not just a trade partner but also a potential economic and political adversary.”

The effects tariffs have on small business

Increased tariffs and resulting trade wars have cost American businesses big and small $94 billion between February 2018 and April 2021 alone, according to Tariffs Hurt the Heartland, a coalition of businesses and trade groups that oppose the tariffs. Automakers, tech companies and agricultural producers have been especially hard hit, but the National Retail Federation has also compiled profiles of affected small business owners from music teachers to gift shop owners.

While businesses were initially worried about selling products during the COVID-19-related global recession, the impact of insufficient supplies and production bottlenecks has reverberated through the supply chain, with tariffs only making the cost pressures worse. “Businesses have to either swallow this increase in price, or pass it on to the end consumer,” Gouri Suresh said.

Tariffs can be challenging for certain businesses and industries

Big businesses are in a better position to absorb higher costs than their smaller competitors. That’s because small businesses may lack the bargaining power to shift some of the tariff on foreign sellers, said Tidemann: “Large businesses may buy goods in sufficient scale that foreign suppliers will willingly cover some or all of the tariff just to avoid potentially losing the sale to another supplier.”

Small businesses may also lack the specialized managerial manpower of their corporate competitors, making it challenging to quickly identify alternative suppliers or strategies to avoid tariff burdens, added Tidemann.

“Tariffs may just magnify the price increases that consumers are already witnessing as the economy recovers from the COVID recession,” he said, citing a proposed increase in tariffs on Canadian lumber. “With lumber prices already soaring due to limited supply amid the current housing boom, raising tariffs on Canadian lumber is only likely to exacerbate the rising price of new housing construction or prices of other products reliant on lumber for production.”

Tariffs can indirectly help domestic businesses

Tariffs on foreign goods should benefit domestic producers making similar products, as their products could suddenly become less expensive than those from competitors who face additional taxes on their goods. That being said, domestic businesses may eventually raise prices as well due to increased demand for their goods, Gouri Suresh said, but this could come at great expense to other producers and end consumers.

“For instance, American steelmakers are reportedly seeing bigger profits from higher demand, increased prices and a boost in production. But the higher prices could reverberate negatively throughout the economy since almost all industries use steel,” he said.

How to prepare your business for economic changes

Although tariffs have not been reapplied on Canadian steel and aluminum, the concern many economists have is that the U.S. has been too slow to reverse the policies placed by the Trump administration. Overall, the Biden administration’s support for tariffs is not unexpected, said Tidemann, given his long-standing advocacy for protectionist policies that aim in theory to boost purchases of American-made goods and services. “While this may change in the future, we should not be surprised if the current tariff policy remains relatively unchanged over the remainder of Biden’s time in office.”

While this makes it easier to plan more efficiently, there are some additional steps you could take to better position your business for economic changes.

Cut back on operating expenses where you can

To minimize the price increases that you’d have to pass on to customers, consider cutting back your operating costs as much as possible. This could allow you to run the business on a tight budget when needed.

Apply for a tariff exemption

Several categories of goods are exempt from tariffs, such as items that are necessary for health and safety. Goods are exempt on an industry-wide basis, and large groups of lobbyists and business owners must typically work together to seek exemptions.

Companies affected by recent tariffs may request to be excluded from Section 301 tariffs on Chinese goods. Those who have filed exemption requests with the Office of U.S. Trade Representative claim they are unable to find comparable goods outside of China or that it would be extremely costly to do so. Approvals for these requests, so far, have been low, at around 5%-7%.

Consider an industry change

If you can easily alter your business concept or the way you produce goods, you may find ways to avoid the added cost of tariffs. “Being nimble is going to be a really big boon for businesses who can reconsider what they’re buying and selling in the post-COVID world and adapt accordingly,” Gouri Suresh said. “The economy is in a state of flux and so it’s a good time to carefully consider an industry change.”

Use your network to stay abreast of tariff changes

It may feel difficult to run a small business while also keeping tabs on international trade wars and policy changes. Consider reaching out to organizations that represent business owners in your industry to see if they have any resources you can use to stay informed of changes and how they may impact your business.

The bottom line on how tariffs affect small businesses

U.S. tariffs on Chinese goods are hurting some American firms more than the intended target, Gouri Suresh said. The widespread impact on U.S. businesses and consumers may not be sustainable and tariffs could soon decrease. But if not, high prices on imported goods may become the new normal, and small businesses will likely continue to feel the effects of high tariffs.

“In the long run, either the tariffs end or everybody learns to live in this new world,” said Gouri Suresh. “If I were a small business owner, I would consider planning ahead with some confidence due to the greater predictability in current tariff policy than what we’ve seen before.”

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How to Spot a Pyramid Scheme: 5 Red Flags to Avoid

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A pyramid scheme is a type of scam where participants pay to join a business and can make money by convincing others to “invest” in the opportunity. The people recruiting you will often promise that you’ll receive something greater than what you put into the opportunity yourself.

It’s often difficult to tell the difference between a pyramid scheme and legitimate multi-level marketing (MLM) business because, in many ways, the two are similar. So, it’s important to be on the lookout for red flags. Companies that focus heavily on new member recruitment over product sales may claim to be MLM companies, but they are often pyramid schemes in disguise.

How does a pyramid scheme work?

A pyramid scheme is a type of investment scam that may rely on individual distributors to sell its products to the public. To become a distributor (sometimes called a consultant, retailer, or contractor), you must pay a fee or perhaps purchase a supply kit to get started. You may then earn commissions when you recruit additional sellers who pay an entry fee themselves or when those investors purchase inventory to resell.

Here’s an example of a formula that a pyramid scheme could follow. Let’s say a seller makes a $500 investment to join the business. She is told she would be rewarded $150 per person if she recruits three more sellers (aka her downlines), who would each make their own $500 investment in the business.

From there, she would earn $30 for each new member that her recruits bring on (aka her second-level downlines). All of her recruits are given the same offer.

The original seller stands to make an increasing profit on her $500 investment, depending on how many people her recruits bring into the company. But each new member would make $450 at the first level, $50 short of their break-even point if they only recruit three more people. If they can’t pass the first level, they won’t get a return on their investment. Meanwhile, the company would continue to collect $500 from every new recruit, although it would have to pay commission to those who recruit more new members.

Why are pyramid schemes illegal?

Pyramid schemes are illegal in the United States because they are scams at heart. They promise investors their money back (and often huge multiples of their initial investments), but they fail to deliver. In reality, they are not legitimate investment opportunities. It’s the founders of these schemes, and top-tier management, who generally profit off the investments of lower-level sellers.

Dr. Stacie Bosley, associate professor of economics at Hamline University, says the key is that pyramid schemes aim to deceive.

“The vast majority of people are likely to lose money by design, and so for that reason it’s considered a deceptive tactic and is illegal,” says Bosley.

Both the Securities and Exchange Commission and the Federal Trade Commission enforce laws pertaining to pyramid schemes. You can report suspected pyramid schemes to either law enforcement agency via the links below:

You can also report suspicious activity to your state attorney general.

Bosley cautions that pyramid schemes involve a different type of risk than you might encounter in other fraudulent schemes.

“If you think there’s a chance that something might be a pyramid scheme then you owe it to yourself and to others that you care about to stop and assess the situation,” she says. “The risk isn’t just to you. It’s also to your family and your social circle.”

5 ways to spot a pyramid scheme

Before you sign up for any direct selling opportunity, you should keep an eye out for the following red flags that could indicate it’s a pyramid scheme.

  1. It’s sold as guaranteed passive income or an easy money opportunity.
    Pyramid scheme participants often present their companies as opportunities to make more money with little effort on your part. Some may even suggest that you’ll earn passive income without having to do any work yourself. In reality, selling enough products to turn a profit takes hard work in any business.
  2. There’s a promise of unrealistic returns in a short amount of time.
    You should be wary of any company that promises you high monetary returns on your investment in a short period of time. And if the promised returns are tied to recruitment rather than product sales, it’s a double warning sign.
  3. You have to pay high upfront fees.
    If the initial investment or buy-in fee is higher than the value of the products or inventory you’ll receive, the opportunity could be a pyramid scheme. According to the Direct Selling Association, the median cost to purchase a start-up kit with supplies, samples and materials to help you sell products is just $99.
  4. There’s no buyback system.
    It’s not unusual for multilevel marketing (MLM) companies to require their new members to purchase products they will resell to consumers. Reputable companies should offer to buy back the product, however, should you wish to leave the business. A company that doesn’t offer a system to buy back unused products may be a pyramid scheme posing as an MLM.
  5. The explanation of the opportunity contains abstract language.
    The compensation schedules of pyramid schemes are often complex, and may contain abstract language that confuses you. “Don’t put your money in something you don’t understand,” Bosley says. “And don’t be embarrassed about it. It may be complex or misrepresented so it’s confusing by design.”

Pyramid scheme vs. MLM

The lines between a pyramid scheme and a multilevel marketing business can often blur. Yet the main differentiator between the two comes down to recruitment. If the primary way you make money is by getting others to pay to sign up under you, then the opportunity is probably a pyramid scheme.

“The moment recruitment becomes part of the job description is a moment to pause,” says Bosley.

Joseph N. Mariano, president of the Direct Selling Association, also cautions consumers against signing up for recruitment-focused opportunities. When you’re trying to tell the difference between a pyramid scheme and an MLM, Mariano says “ensure the company is product-focused and not based primarily on recruiting new team members.”

Here’s a side-by-side comparison to help you tell the difference between a multilevel marketing company and a pyramid scheme.


Pyramid scheme

MLM company

How you make moneyThe company rewards you more for recruiting new participants than it does for selling products to customers.Product sales are the primary way you earn money (though recruitment may still be a part of the compensation structure).
What happens to unsold inventoryThe company won’t buy back unused inventory.The company offers a buyback program and exit strategy for sellers.
What it costs to joinYou must pay a high buy-in fee to participate.The initial investment cost makes sense based on the value of the products you receive.
Product offeringsThe company’s product descriptions and claims are misleading, confusing or vague.There’s genuine consumer demand for the products the company offers.
ResourcesThe company doesn’t seem concerned about helping you sell the product.You will receive training or marketing materials to help you sell the product.

When direct selling could pay off

In 2020, there were 7.7 million direct sellers in the U.S., according to the Direct Selling Association — 900,000 full time and 6.8 million part time. According to Mariano, most of those direct sellers or independent contractors are “microentrepreneurs who are interested in earning a modest supplemental income sharing and selling the products and services they use and love.”

Yet despite the popularity of MLMs, numerous experts and studies suggest that most participants either earn very little, lose money or break even.

  • A MagnifyMoney survey found that most MLM participants earned just $0.67 an hour — and that’s before deducting business expenses.
  • An AARP survey found that only 25% of people who join multilevel marketing companies reported earning more than they invested in the business.

To be fair, there are some individuals who are successful at legitimate direct selling. But these people tend to dedicate a lot of time and energy to sales, approaching the opportunity like a full-time job or small business. If you expect to put in little to no effort and reap big financial rewards, you’ll almost certainly lose your initial investment and be disappointed in the results.