There is no objective definition of “small business,” though the U.S. government has a 44-page document that lets us know what “small” is in various industries for the purposes of federal contracting. Many people might be surprised to know that companies with up to 500 employees (or up to 1,500 in some fields) are considered small by federal standards. Other industries are classified by average annual receipts, in which case small means up to $750,000 in receipts (if you’re an apple grower) or $35.5 million (if you run a Job Corps Center).
I was reminded of these distinctions by the latest brouhaha over the federal Small Business Innovation Research (SBIR) program, which awards grants to small businesses to conduct high-risk (from a profitability perspective) research that addresses a particular need of one of eleven federal agencies and departments.
Intuitively, I feel that a company with 500 employees is probably larger than “small.” The U.S. Small Business Administration (SBA) likely had to set a higher threshold due to lack of response and capacity, and therefore an inability to meet small business contracting goals, from smaller firms.
That’s all well and good, in terms of federal procurement. However, I feel that truly small businesses are not given enough attention when they are lumped in with companies of 400 employees and perhaps tens of millions in revenue. The startup entrepreneur has very different needs than those companies, and I’m not sure how well the “Small” Business Administration serves the average start up.
According to common wisdom, the biggest reason small businesses fail is lack of capital. (This is probably a self-reported statistic, however, and how many failed owners will identify “poor management” as the reason their biz went bust?) Does the SBA provide much capital assistance to new entrepreneurs?
As far as I can tell, a true start up has very little chance of borrowing money through an SBA-guaranteed loan, unless they have significant collateral (usually this means a second mortgage on a personal residence) or a fairly lengthy cash flow history. So the only thing SBA can do for most small business is to offer counseling and training at Small Business Development Centers and SCORE chapters, which is nice but not enough. In fairness, they do also have some fine online training courses, Spanish-language content, and programs to advance women-, minority-, and veteran-owned businesses. But is this a sufficient return on an $825 million budget (2009 estimate, not including loans and guarantees)?
Maybe the SBA should change its name to the U.S. Medium-Sized Business Administration, or better yet, spin off another agency that really focuses on the small entrepreneur. Offer direct microloans to new businesses, along with mandatory and extensive training programs. If the new firm has a clean record after a certain time period, step up the financing limit. Use fees and interest, not tax dollars, to finance the administration of these programs. These are things that have worked in the private and non-profit sectors; I’m sure our highly creative legislators and policy analysts could invent even more effective tactics, if their goal was really to help the smallest of businesses grow.
Filed under: Money & Capital, SBA Tagged: | business lending, small business loan, U.S. SBA
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