How Important are Small Businesses to the U.S. Economy?

Well according to U.S. Dept. of Commerce and a number of other reliable sources, small firms practically sustain the US economy, for example, small businesses:

  • Represent 99.7 percent of all employer firms.
  • Employ half of all private sector employees.
  • Pay 44 percent of total U.S. private payroll.
  • Generated 65 percent of net new jobs over the past 17 years.
  • Create more than half of the nonfarm private GDP.
  • Hire 43 percent of high tech workers ( scientists, engineers, computer programmers, and others).
  • Are 52 percent home-based and 2 percent franchises.
  • Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.
  • Produce 13 times more patents per employee than large patenting firms.

And still the small business owner is waiting for credit to ease, especially the business owner wishing to transition and move onto the next stage of their lives. However, according to Federal Reserve Board, Senior Loan Officer Opinion Survey, credit conditions are improving. In mid-2010, commercial banks began to ease the tight lending conditions on small businesses that had begun in early 2007. And credit has continued to flow, as loans under $1 million totalled $695 billion in FY 2009. Also, after declining over the past few years, venture capital investment dollars increased in mid-2010.

Small businesses are heavily reliant on owner investment and bank credit, averaging about $80,000 a year for young firms. Startups rely about equally on owners’ cash injections into the business and bank credit; young firms receive about three-quarters of their funds from banks via loans, credit cards, and lines of credit. One-tenth of startups and about a third of young firms do not use capital injections.

But, how do the established businesses fair?….again the U.S government departments responsible for commerce state that seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Census data report that 69 percent of new employer establishments born to new firms in 2000 survived at least 2 years, and 51 percent survived 5 or more years. Survival rates were similar across states and major industries. Bureau of Labour Statistics data on establishment age show that 49 percent of establishments survive 5 years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more. Which are sobering statistics.

Since 2005, bankcrupticies have gone from 39,201 to a whopping 60,837 in 2009…not an encouraging trend. However, the figures may be distorted somewhat, as three quarters of all U.S. business firms have no payroll. Most are self-employed persons operating unincorporated businesses, and may or may not be the owner’s principal source of income. Because nonemployers account for only about 3.4 percent of business receipts, they are not included in most business statistics, for example, most reports from the Economic Census. However, since 1997, non-employers have grown faster than employer firms. A trend possibly due to the dissatisfaction workers have nowadays with corporations, whether small or large.

Census data show there were 5.7 million firms with employees and 17.6 million without employees in 2002 (and 18.6 million without employees in 2003). Applying the sole proprietorship growth rates to the nonemployer figures and similar Department of Labor growth rates to the employer figures produces the 24.7 million figure. Small firms with fewer than 500 employees represent 99.9 percent of the 24.7 million businesses, as the most recent data show there are 17,000 large businesses.

So, not sure what your answer is, but mine is a resounding yes to the title question…small businesses are the backbone of the country.

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