America's economy relies on SMB
The idea that small and medium-sized businesses are integral to the American economy is nothing new. We’ve heard it echo in the mouths of our leaders, politicians and news anchors. We’ve seen the impact these businesses have had in shaping our country. But do we understand the scope and breadth of their presence? The power they have to shift culture and withstand economic uncertainty? What about the challenges small business owners face?
Taking a look at the numbers, America is host to over 28 million small businesses. These account for 54% of all sales within the U.S. That is no small feat. Beyond that, they provide 55% of all jobs in the country. This information alone is enough to confirm the common belief that small businesses are America’s back bone, and the blog post could end right here. But I want to dig a little deeper.
Whereas big business can become tied down by varied stakeholders and bureaucracy, smaller businesses have the opportunity to be nimble and scrappy. It’s because of this that they’re a large driver of culture and innovation. Small businesses own 43% of overall tech employment which leads them to produce 16 times more patents per employee. This constant leap towards innovative work fuels competition—fostering even innovation and creativity that small to medium businesses develop.
Small business foster greater diversity
These companies also foster greater diversity and promote entrepreneurship to minority groups throughout America. By 2012, over 14% of small business owners were minorities. That’s over 5.8 million businesses, and the number continues to grow. This is also reflected in the 36% of them owned by women and 9% owned by veterans. While there’s a long way to go, these advances work to change culture and improve diversity in products, communications and understanding throughout the nation.
Beyond cultural diversity, small and medium-sized businesses allow for more diversity in product offerings. They can quickly bring new items to the market because they don’t get caught up in bureaucracy. In terms of retail, where big box stores are confined to certain brands, smaller stores provide a variety of inventory to choose from. Customers are exposed to products from even smaller and global vendors that would have otherwise been out of reach. While it may seem logical that bigger stores have more to offer, smaller retail shops prove bigger doesn’t necessarily mean more diverse.
While it’s clear that small businesses support a large portion of our economy, are they strong enough to withstand economic decline and uncertainty? So far, so good. The small business sector continues to grow, even as bigger companies continually downsize. Despite periods of recession and slow economic growth, the number of small businesses in the United States has increased around 49% in the past 30 years. Where big business has eliminated 4 million jobs, small business has added 8 million. In fact, two of every three new jobs in the country are created by small business.
While they can have a turbulent start, these companies more easily respond and adapt to change. This allows them to weather uncertain economic climates where larger businesses may struggle. Research indicates that customers tend to stay loyal to their favourite small businesses throughout uncertain economic periods. It is because of this proximity to their customers that small and medium business owners understand their customers more than anyone, and can quickly adapt to market changes. Entrepreneurs also have the innate ability to adapt and be resourceful. More often than not, their companies are started with less than $20,000 in capital. They’re accustomed to doing a lot for a lot less than larger corporations.
While this all seems promising and positive, the picture is not always perfect. Just over 20% of small businesses close within their first year and around half of them close before their first five years. But, once they make it past this hurdle, they have a 90% chance of staying strong for an additional year. Besides this, there a number of recurring issues these companies face. Owners often work constantly, as the businesses are not able to run without them at the helm which is a dangerous business model. They’re also usually dependent on one larger client to make up most of their business, which means losing that client is detrimental to the entire business.
Despite all of this, if you’re willing to take a chance with a well-planned and impeccably executed business launch, the success is well worth the risk.
David Schwedel is a U.S. based SMB investor with a demonstrable career in building businesses and creating shareholder value for more than 25 years. He has a depth of experience in complex cross-border financing, project financing, and global capital markets. Mr. Schwedel specializes in Small & Medium- sized Business Investing within the energy technology, petrochemical, and manufacturing industries.