The Driving Force of the US Economy

Most of the time in the business world, the focus is on large corporations – quarterly earnings or losses, their newest product, the latest corporate scandal, or their latest complaint about taxes.

giant corporation stepping on small businessWe rarely hear anything about small businesses, often defined as businesses with less than 500 employees. Yet, if you look more deeply, you will find small businesses are the main engine for economic growth in America.

A few facts about small businesses in the United States:

  • 99.9% of all businesses are small businesses.
  • There are 30.2 million small businesses.
  • 30% have one employee; 40% have between 2 and 5 employees; and 10% have between 6 and 10. Only 20% have between 10 and 500 employees.
  • Only about 18,500 businesses have more than 500 employees.

Statistics from 2012 (the most recent year available) reveal

  • 6% of small businesses are minority owned.
  • 36% are owned by women.
  • 9% are owned by veterans.

Historically, small businesses have accounted for over 60% of the new jobs created in America. Coming out of the 2008-2009 recession, small businesses were responsible for 67% of new jobs nationwide.

 Impact on the US Economy

Here is something else that may surprise you: following consumer spending, small businesses have the greatest impact on the American economy.

For some time now, the unemployment rate has been dropping consistently; in May, 2018, it was 3.9%, the lowest it has been since the 1960s. Most credit large businesses for this, but actually the greatest increase in employment has been at small businesses.

Each year the US Small Business Administration (SBA) compiles a profile of small businesses; the most recent was created in February 2018.  In that profile, the SBA reported the following for 2015 and 2016:

  • Small businesses employed 58.9 million people. That is 47.5 percent of the American workforce.
  • In 2015, 1.9 million net jobs were created. That averages 158,333 jobs monthly.
  • The median income for self- employed people working in their own incorporated businesses in 2016 was $50,347.
  • The median income for self-employed at unincorporated businesses in 2016 was $23,060. They aren’t exactly rolling in dough.
  • Small businesses were responsible for 32.9% of the $1.3 trillion dollars of exports in 2015.

Here are two other stats from the SBA:

  • Small Businesses are responsible for 50% of the non-farm GDP.
  • They also account for 16 times more patents per employee than larger businesses.

Impact on Local Economy

 Small businesses have a tremendous impact on the local economy.

  • Local, small businesses create more jobs than large businesses. In fact, according to the Institute for Local Self Reliance (ILSR), $10 million in sales at Amazon supports 19 jobs, whereas the same sales volume at small retail stores supports 47 jobs.
  • They provide employment for area residents. Most small business employees live and work in the same area.
  • Employees spend their money locally. In addition, they support the local economy by paying sales and property taxes.
  • In a study comparing a nationwide chain store to local retail businesses in Austin, Texas in 2003, the American Independent Business Alliance (AMIBA) found only about $13 of every $100 spent at the nationwide chain store stayed in the local area, whereas $45 out of every $100 spent at local businesses went back into the local economy.
  • Small local businesses typically get most of the supporting services they may need from local vendors whereas large multi-site businesses don’t.
  • Small retail businesses offer more locally produced products than their large competitors.
  • Small businesses and their employees typically are more involved in local civic and environmental issues than their large nationwide counterparts.

Not only that, but most people have greater trust than they do large concerns in small businesses.

Satisfied Customers

Small businesses realize satisfied customers are the lifeblood of their business. Without their purchases, they wouldn’t survive, so they go out of their way to treat them well.

Large businesses talk about customer satisfaction, but they rarely follow through. Few corporate employees care for their customers the way their small business counterparts do.

According to Naomi Mannino, in “Survey: Why Customers Love Small Businesses:”

“Smaller businesses have a way to set themselves apart from their larger competitors, according to the results of a CreditDonkey.com survey. Big corporate usually fails to meet expectations for 35.9% of over 1,000 respondents to our customer service survey. Conversely, when dealing with a small business, just 5.7% of respondents said customer service expectations are usually missed.”

Over-Hyped Yet Under-Served

Politicians often claim they care about small businesses. But when it comes to legislating, their votes tell another story. There are exceptions, but as a rule, small businesses

  • Don’t receive the same Federal tax breaks larger corporations do.
  • Don’t get tax breaks from local, county and state officials for relocating offices or setting up new production facilities.
  • Don’t move offshore to shelter their earnings.
  • Don’t receive federal “Bail Out” money.

Banks play a similar game. They talk about their generous small business lending programs, but the reality is, only a very small percentage of small businesses are able to get bank financing.

Following the economic crisis of 2008-2009, small business loans from banks and other financial institutions all but disappeared. Since they didn’t have the collateral to guarantee these loans, small business owners were considered high risk.

In “Small Business Trends – A Look at the State of Small Business in 2018,”  Guidant Financial reported:

“In order to get enough cash to open their doors, the majority of business owners (59 percent) used their own cash, but many relied on more than one funding method. Funding from friends and family accounted for 23 percent of funding methods used, and 401(k) business financing came in third at 22 percent. Surprisingly, only 17 percent of respondents relied on a line of credit and 7 percent an SBA loan to launch their business.”

And when banks do lend to small businesses, they squeeze every nickel and dime. According to a June 2016 article in USA TODAY,  if a small business requests a loan for $100,000, the average amount it will actually get is $40,500.

George Bailey vs Mr. Potter

It’s a Wonderful Life is one of the most popular films of all time. In the movie, the little guy with a heart — George Bailey — triumphs over Mr. Potter, the avaricious banker and uber-capitalist.

Most Americans believe this is the way things should be, but our economy has taken a different path: since the 1970s, the Potters have been crushing the Baileys of the world. It’s a bit depressing, but it’s not hopeless.

Here are a few steps you can take to help small businesses get the respect they deserve:

  • Purchase products and services from small and/or locally owned businesses wherever you go.
  • Whenever you find a great small business, spread the word. Tell your friends, relatives and anybody else who will listen.
  • Contact your federal, state and local government officials and tell them you want a level playing field for small businesses.

About Andrew Clarke

Andrew Clarke is President of Ground Floor Partners. Over the past twenty years he has advised hundreds of small businesses on strategy, marketing, real estate and finance. He is passionate about small business, social and environmental justice, and is a proud member of the American Sustainable Business Council, Food and Water Watch, Green America, Food Consultants Group, and the American Planning Association.

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