The Small Business Act, originally passed in 1953, defines a small business as "one that is independently owned and operated and which is not dominant in its field of
TABLE 5.2
| Employment size of employer firms, by selected characteristics, 2001 | |||
| Employment size | Firms | Employment | Annual payroll ($1,000) |
| SOURCE: "Table 2a. Employment Size of Employer Firms, 2001," in Statistics about Business Size (including Small Business), U.S. Census Bureau, 2001, http://www.census.gov/epcd/www/smallbus.html#EmpSize (accessed January 4, 2005) | |||
| Firms with no employees (as of March 12) | 703,837 | 0 | 34,289,996 |
| 1 to 4 employees | 2,697,839 | 5,630,017 | 153,691,559 |
| 5 to 9 employees | 1,019,105 | 6,698,077 | 178,881,075 |
| 10 to 19 employees | 616,064 | 8,274,541 | 236,986,003 |
| 20 to 99 employees | 518,258 | 20,370,447 | 624,313,095 |
| 100 to 499 employees | 85,304 | 16,410,367 | 539,384,914 |
| 500 to 999 employees | 8,572 | 5,906,266 | 203,984,554 |
| 1,000 to 1,499 employees | 2,854 | 3,474,455 | 120,671,152 |
| 1,500 to 2,499 employees | 2,307 | 4,419,771 | 161,281,065 |
| 2,500 to 4,999 employees | 1,770 | 6,063,596 | 232,662,113 |
| 5,000 to 9,999 employees | 934 | 6,456,068 | 255,249,225 |
| 10,000 employees or more | 930 | 31,357,579 | 1,247,691,572 |
operation" (http://www.sba.gov/businessop/standards/smallbus.html, accessed March 13, 2005). The size of what is considered a small business varies by industry, and size standards are determined by the Small Business Administration's (SBA) Office of Size Standards, which issues standards according to a business's number of employees or its average annual receipts. The more generally accepted definition of a small business, however, is one that employs fewer than 500 people at any one time. According to the SBA, in 2002 there were 22.9 million small businesses operating in the United States, and small businesses overall accounted for 99.7% of all employers (http://www.sba.gov/aboutsba/sbastats.html).
Home-Based Businesses
Small businesses operated out of a person's home may be organized as any of the legal business structures. In 2003, 53% of all small businesses in the United States were home-based. Of those, 60% were in service industries, 16% in construction, 14% in retail trade, and the remaining 10% in a variety of other sectors, including finance, communications, manufacturing, and transportation. About 91% of home-based businesses were sole proprietorships; 5% were subchapter S corporations; and 4% were partnerships. Almost all (91%) home-based businesses as of 2003 had no employees, and less than half operated on a full-time basis. In fact, owners of home-based businesses reported working approximately twenty-six to thirty-five hours per week, about ten hours a week less than owners of companies that operated outside the home ("The Small Business Economy: A Report to the President," U.S. Small Business Administration Office of Advocacy, http://www.sba.gov/advo/stats/sb_econ2004, 2004).
The Small Business Administration
The Small Business Administration (SBA) was created in 1953, with the passage of the Small Business Act.
TABLE 5.3
| Startup costs and expected income for solo entrepreneurial businesses, 1999 | |
| Test variable | Result |
| SOURCE: Blade Consulting Corporation, "Table 5-2. Financial Needs and Expected Income for Solo Nascent Entrepreneur Businesses," in Expected Costs of Startup Ventures, U.S. Small Business Administration, November 2003, http://www.sba.gov/advo/research/rs232tot.pdf (accessed January 4, 2005) | |
| Funds needed for startup to be self-sustaining? | Median=$6,000 |
| First 30 days operating cash needs | Median=$1,000 |
| Expected firm income: 1st year | Median=$25,000 |
| Expected firm income: 5th year | Median=$90,000 |
The SBA's purpose is to support small businesses by offering financial and counseling assistance and ensuring that small businesses can compete against large companies in receiving government contracts. Since the SBA was established, it has granted some form of aid to almost 20 million small businesses. As of 2003, the SBA offered more loans than any other single financial backer in the United States: 219,000 loans worth approximately $45 billion.
HISTORY AND DEVELOPMENT OF THE SBA. In 1932 Congress created the Reconstruction Finance Corporation (RFC), a federal lending program, to help American businesses that were struggling to survive during the Great Depression. The RFC was a valuable resource for both small and large businesses throughout the 1930s, up to American entrance into World War II. At that point, the number of government contracts to private businesses increased dramatically as more war-related products and machinery were needed. Large companies began to out-pace smaller firms in production rates and therefore received more manufacturing contracts. In response to the disparity, the government created the Smaller War Plants Corporation (SWPC) in 1942 to ensure that small manufacturing companies could compete against their larger rivals. The SWPC became obsolete at the war's end in 1945, but some of its programs were moved to the RFC, with the Department of Commerce's Office of Small Business filling in the gaps to offer educational services to small business owners. During the Korean War (1950–53), the U.S. government again created a special agency, the Small Defense Plants Administration (SDPA), to help small facilities earn manufacturing contracts. Like the SWPC, the SDPA was intended to be a short-term solution and was limited to assisting manufacturers that made war-related products.
In 1952 the RFC was abolished, and in its place President Dwight D. Eisenhower proposed the creation of a permanent agency to address the challenges of America's small business owners. In 1953, when the Small Business Act was signed into law, the SBA was established. Major goals of the SBA included making direct loans and guarnanteeing bank loans to small businesses, offering business training and resources, and providing funding to small businesses affected by natural disasters. The SBA continues the work of earlier war-time programs in guaranteeing a certain number of government contracts to small businesses. Additional legislation over the years included the Investment Company Act of 1958, which created the Small Business Investment Company (SBIC) to encourage the development of venture capital investment firms (venture capital is money invested in companies that add new or unique value to their industries and promise to yield high growth). In the 1960s and 1970s much of the SBA's focus was on assisting socially and economically disadvantaged entrepreneurs with its Equal Opportunity Loan (EOL) Program, which was intended to stimulate business activity among Americans living below the poverty level. The SBA has since developed programs to offer technical, financial, contracting, and disaster recovery assistance, as well as specialized assistance that addresses the needs of women, minorities, young entrepreneurs, veterans, Native Americans, and international trading groups.
Despite the assistance available through the SBA, relatively few new business owners seek the agency's help. Of those starting small businesses in 1999, only 3.4% went to the SBA for financing. (See Table 5.4.) That may be in part because nearly half of all new businesses needed less than $5,000 to become self-sustaining, and more than 15% needed less than $1,000, according to the SBA. (See Figure 5.1.) Many critics, however, have questioned the continuing relevance of the agency. In the 1990s the SBA discontinued its direct loans, focusing instead on its 7(a) Loan Guaranty Program, which guarantees loans through commercial lenders; in 2000, 90% of SBA loans were 7(a) loans. According to Joanne Y. Cleaver ("Is SBA S.O.L.?" Entrepreneur Magazine, http://chat.entrepreneur.com/article/print/0%2C2361%2C292837%2C00.html, October 2001), the SBA's loan approval process had become long and complicated by the mid-1990s, driving away potential clients. In response, the SBA instituted its LowDoc Program, which required less paperwork.
Overall, as Cleaver pointed out, the SBA had developed a "murky, undefined image" because of its numerous programs and apparent lack of focus. According to Cleaver, as interest in small business increased during the 1990s, nonprofit groups dedicated to entrepreneurship sprang up. Many people who would otherwise have turned to the SBA turned instead to these alternative organizations, many of which offered the same services as the SBA but with less red tape. In 2000 the George W. Bush administration proposed cutting the SBA's budget by 40%, from $724 million in 1999 to $540 million, which would have eliminated the 7(a) Loan Program and the venture capital investment program. A group of senators intervened, restoring $264 million to the budget. But at
TABLE 5.4
| Sources of funding for entrepreneurial businesses, 1999 | |
| Test variable | Result |
| SOURCE: Blade Consulting Corporation, "Table 5-4. Sources of Funding for Solo Nascent Entrepreneur Businesses (Beyond Personal Savings)," in Expected Costs of Startup Ventures, U.S. Small Business Administration, November 2003, http://www.sba.gov/advo/research/rs232tot.pdf (accessed January 4, 2005) | |
| Asked for funding from spouse | 18.0% – Yes |
| Asked for funding from friend or family | 13.7% – Yes |
| Have used a personal credit card | 31.1% – Yes |
| Have taken a second mortgage | 2.1% – Yes |
| Will seek a bank loan | 8.0% – Yes |
| Asked for funding from SBA | 3.4% – Yes |
| Asked for funding from a venture capitalist | 2.6% – Yes |
that point the existence of the SBA appeared to be tenuous. In response, the agency attempted to streamline its operations and cut its own budget. In fiscal year 2005 the SBA requested a federal budget allotment of $678.4 million, with the ability to provide $25 billion in new loans to small businesses.
Trends in Small Business
Small businesses often get their start during economic downturns, when larger businesses have to scale back by cutting jobs. Table 5.5 shows the growth of self-employment and small business indicators between 2001 and 2003. Yet there is surprisingly little change in the total number of small businesses over time; this reflects a constant "churn" in the economy, as unsuccessful small businesses close and new ones are started. Table 5.6 shows the number of small businesses that opened and closed, by quarter, between 1999 and the third quarter of 2003.
In the postrecession economy of 2004–05, small businesses were growing rapidly. According to Entrepreneur magazine's annual listing of its "Hot 100" businesses ("Heat Wave," June 1, 2004, http://www.entrepreneur.com/Magazines/Copy_of_MA_SegArticle/0,4453,315557,00.html), the fastest-growing small businesses in fiscal year 2004 had combined sales of $1.1 billion, up from $923.5 million the year before. Businesses on the list were in existence for an average of thirty-seven months, versus the previous year's twenty-nine months, and they averaged 48.5 employees each, as opposed to 2003's average of 31.6. Industries represented on the list included business services, with nineteen entries; construction and home improvement, also with nineteen; technology services, with fifteen; manufacturing, with twelve; and financial services, with six.
One of the fastest-growing groups of small business owners is women. According to the National Women's Business Council ("Women Business Owners and Their Enterprises," March 2005, http://nwbc.gov/ResearchPublications/documents/key_facts_about_women_business_owners_2005_03-05), between 1997 and 2004 the number of
FIGURE 5.1
businesses completely or half-owned by women grew by 23%, versus a 9% growth rate for all privately owned U.S. businesses in the same time period. New businesses owned by minority women in particular saw a huge increase: The number of companies started by minority women increased by 55% from 1997 to 2004. In 2004 there were 10.6 million businesses half or completely owned by women; these companies employed 19.1 million people and generated $2.46 trillion in revenue. Businesses that were majority-owned by women of color employed 1.3 million people and generated $147 billion dollars in revenue. Of businesses that were at least half owned by women, 85% were sole proprietorships and 15% were either partnerships or corporations. The number of women-owned businesses in construction increased 57% from 1997 to 2004; 44% in agriculture; and 38% in transportation, communications, and utilities, reflecting women's entrance into nontraditional industries. In its report Women-Owned Businesses in 2004: Trends in the Top Fifty Metropolitan Areas ("Women-Owned Businesses Continue to Grow in Top Fifty Metropolitan Areas," September 20, 2004, http://www.womensbusinessresearch.org/pressreleases/9-20-2004/9-20-2004), the Center for Women's Business Research noted that women-owned businesses "increasingly are driving the economic health of the top fifty metropolitan areas through job creation and generation revenues," with women-owned businesses in the fifty metropolitan areas studied growing at a rate that outpaces the growth of the overall U.S. economy.
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