Even Little Blue Engines Need Fuel

Even Little Blue Engines Need Fuel

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By Marsha Bailey, CEO & Founder

If “small business is the engine of our economy,” as so many politicians constantly remind us, why isn’t more being done to ensure that those small businesses get the capital and support they need to grow and prosper?

First, we need to define our terms. What is a small business? The U.S. Small Business Administration (SBA) defines small business as one with 500 or fewer employees. Using this definition, 99.7% of all businesses are small and provide 49.1% of private sector employment. Many banks define a small business as one with less than $20 million in annual revenues!

I’ve done my own (admittedly unscientific) poll on the question. When I speak to small groups, I ask them to define a small business based on the number of employees. By the time I hit 50, pretty much all the hands have gone down. Most people define a small business as one with 20 or fewer employees. In fact, 92% of all businesses are what we in the business development field call “micro businesses.”

Jeff Stibel, in a recent HBR blog post shares data recently released from Dun & Bradstreet stating that small businesses are growing revenues faster than large businesses, and micro businesses are growing revenues the fastest.  Despite the growth in revenues, very small businesses are not doing much hiring and here are some reasons why:

Access to capital: the smaller the business, the harder it is to get a bank loan. According to a Pepperdine study, only 19% of micro business loans are approved while 34% of small business loans are approved and medium-sized businesses enjoy a 75% approval rate. According to a report by the California Reinvestment Coalition, banks tightened credit to small businesses at the beginning of the recession and not much has changed in the six intervening years. “Bank lending to California small businesses is still at only one-third the number of loans in 2007.”

For a micro or small business, hiring a new employee represents a significant investment. Larger businesses have reserves to hire employees until such time as their work pays off in increased revenues. Small businesses generally lack such reserves.

Community Development Financial Institutions (CDFIs) like WEV help fill that gap but the program is allocated only about $220 million a year for the entire country. In contrast, the Small Business Lending Act of 2010 put $30 billion aside for community banks to increase their small business lending. Only $4 billion was utilized by banks as of the end of 2013. So why can’t legislators put even ONE billion a year into the CDFI fund?

Continuing worries about economic instability: Poll after poll indicates that small business owners want stability (don’t we all?). Government brinksmanship makes it difficult for businesses to plan and adapt – especially for those with government contracts. During the recent shutdown, contractors received “stop work” orders that left them holding the bag for hundreds of thousands of dollars in costs already incurred with no idea as to whether they would eventually be paid.

Small businesses often hire independent contractors to help them contend with seasonal and uneven demand for their products and services. Work provided to contractors is not counted by the Labor Department as employment.

Skill sets: Effectively hiring and managing employees is a challenge for small business owners who have little experience in this area. As their businesses grow, many solo entrepreneurs just work harder and longer hours. At some point, it becomes self-defeating to continue along this path: as much as one may try, there’s no way to increase the number of hours in a day.

WEV is providing the fuel that small businesses need:

We’re growing our loan fund. To date, WEV has made over $3 million in loans to help pre-bankable micro businesses start up and expand. Thanks to a $600,000 award from the U.S. Treasury’s CDFI Fund , WEV has more money to expand staff and loan loss reserves.

We’re investing more resources in existing businesses. WEV’s Thrive program provides intensive training, mentoring, coaching and peer support to existing businesses to help their owners grow and acquire the skills they need to meet the changing demands of their businesses. Participants can stay in the program for five years or for as long as they derive value from it.

 

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