Making or Breaking U.S. Small Businesses

November 10, 2009 Updated: October 1, 2015

President Obama wants to increase money available to small businesses. (Jim Watson/AFP/Getty Images)
President Obama wants to increase money available to small businesses. (Jim Watson/AFP/Getty Images)
WASHINGTON—America’s small businesses, often called the driver of the U.S. economy, will finally get a break, if President Barack Obama has his way.

“American entrepreneurs and small businesses are the engines that create new jobs and develop the innovations that will keep our Nation strong,” Karen G. Mills, Small Business Administration (SBA) administrator, said during a Small Business White House ceremony, according to its Web site.

Obama promised to push through Congress a bill to increase small business loans from $2 million to $5 million, increasing “CDC-504” loans to $ 5.5 million, and SBA microloans from $35,000 to $55,000.

Currently, a CDC-504 loan provides small business entrepreneurs with a long-term, fixed-rate loan for up to $1 million to finance fixed assets such as equipment, real estate, and buildings.

“Small Businesses have always formed the backbone of the American economy … The problem is, our small businesses have been some of the hardest hit by this recession,” President Obama said in a recent speech, published on the White House Web site.

According to the latest SBA statistics, there were 29.6 million small businesses in the United States last year with less than 500 employees.

Between 1993 and September 2008, small companies generated 14.5 million new jobs or 64 percent of all U.S. jobs.

More than 50 percent of private sector employees work in small businesses. These companies employ two-fifths of the high tech workers, including engineers and computer programmers, in the U.S.

Small Business Woes

Only one-third of U.S. small business firms reported normal borrowing activities.

About 14 percent of the companies had a hard time procuring funds to run their businesses. Although not desirable, these numbers are still better than pre-1983 levels, when 37 percent of businesses couldn’t get business loans.

“Owners do not see credit conditions easing much in spite of the Federal Reserve’s hugely expansionary policies,” according to a recent National Federation of Independent Business (NFIB) report.

A small number of businesses (11 percent) took the risk and increased sales prices, while 31 percent reduced their selling prices over the past months. The bad news is that weaker sales sliced into the profit of companies and cost reductions have not made a great difference to profitability.

Despite weaker sales, small business owners predict that sales will improve over the coming six months and reported increased sales when compared to March of this year.

The Power of Lenders

America’s small firms are not really at the mercy of banks that have become risk averse and want to hoard funds instead of putting it back into the economy, contrary to a recent RiskCenter report.

“Banks use the Fed as a parking place for their cash, holding far more than the reserve requirements. It’s about $800 billion in total vs. under $60 billion required,” the RiskCenter, a research organization for financial professionals, said in a recent article.

The NFIB claims that only 14 percent of all firms interviewed found it difficult to get loans, and only 4 percent said that getting a business loan is their worst nightmare.

Since the changes to the SBA loan program of the American Recovery and Reinvestment Act enacted on February 17, the federal government has increased support of loans to small businesses by more than 60 percent to a total of $11.3 billion.

The average number of weekly loans approved rose by 50 percent, and in September alone, loans amounting to $1.9 billion were approved. The September increase was the highest since August 2007.

“The Recovery Act was critical to unlocking the market and as a result we’ve helped put billions of dollars of much needed capital in the hands of small business owners during this tough economic time, and brought more than 1,200 lenders back into SBA’s loan programs,” Mills said in the speech at the White House.

The SBA does not directly lend to small businesses, but guarantees lenders that it will pay up if the firm defaults. A lender will not buy into the SBA loan programs unless it perceives a great risk of default, as SBA paperwork can be lengthy.

Small Business Designation

The SBA published a table of standards defining small businesses.

The small business designation is rather complex and mind-boggling when one wants to assure that a business is considered a small business. The SBA takes into consideration industry structure, competition, firm size, start-up costs and barriers to entry, technological transformation, and a slew of other factors.

The SBA published a short list that defines close to three-fourths of U.S. companies as small businesses, but most likely the list is not all-inclusive. For example, a business is designated a small business in the manufacturing and mining industry if it has less than 500 employees, while in the wholesale trade industry, any firm with more than 100 employees is no longer a small business.

In the retail and service industry, firms with revenue up to $6.5 million could be considered a small business. In the general and heavy construction industry, one might be a small business with $31 million or less in revenue. Yet, in the agricultural industry, the small business cutoff is at $75,000.