Defining Small Business
Small businesses face a number of challenges and options when financing energy efficiency and renewable energy projects, some of which stem from how different entities involved in the financing process define “small business.” Interestingly, “small business” is defined differently by different organizations. Below are four different definitions for small business, one each from the U.S. Small Business Administration (SBA), electric and gas utilities, financial institutions, and a study sponsored by the Equipment Leasing & Finance Foundation.
The SBA uses the number of employees and/or the annual receipts as key measurements. SBA evaluates industries independently and publishes “size standards” guidelines for each. The most common categories are 500 or fewer employees for manufacturing industries, 100 or fewer for wholesale trade, $7 million in annual sales for most retail and service organizations, and $0.5 million in revenue for agricultural industries. The size list is organized by NAICS codes (The North American Industry Classification System) and is available on the SBA web site.
Electric and gas utilities measure small businesses by the amount of energy they consume. For example, some electric utilities consider a small business one that has a peak demand of less than 100 kilowatt (kW) per month. Other utilities define small business differently when qualifying them for energy efficiency incentives. For example, NStar in Massachusetts defines a small business as one with a peak demand of 10 kW per month or less. Peoples Gas in Illinois defines a small business as customers that consume less than 41,000 therms per year.
In addition to the size of the business, financial institutions categorize by the size of the loan. While the exact break points may differ by lender, in general, loans under $25,000 are considered “micro loans,” from $25,000–$250,000 “small ticket,” from $250,000–$5 million “middle market,” and over $5 million “large ticket.” The pricing models and underwriting procedures for each of those categories differ, even within the same lending institution.
In 2008, The Equipment Leasing & Finance Foundation commissioned Global Insight to study how small businesses purchased and paid for equipment. In that study the “small businesses” were defined as businesses with fewer than 100 employees; those having fewer than 50 employees were considered “very small.” That characterization is probably more closely aligned with the way most people interpret “small.” The study found that very small businesses only finance about 17% of their capital purchases; the majority of them paid cash or put it on their line of credit at their bank. Small businesses (those with 50 to 99 employees), however, financed almost 45% of their capital purchases. The difference between the two percentages may reflect the difficulty that very small businesses have when trying to borrow money.