Econified

Small businesses are often referred to as the backbone of the economy. Here are some key facts about small businesses from The U.S. Chamber of Commerce:

• There are 33.2 million small businesses in the United States
• Small businesses represent 4.4% of the entire U.S. GDP (in 2023)
• 61.6 million Americans are employed by small businesses. This is 45.9% of the workforce.

With numbers like this, it is clear that small businesses play a large role in our economy. Throughout this post, we will go over what makes a business small, their importance in the economy, and why we protect them.

What makes a business small:

Small businesses are generally thought of as quite small organizations with only a couple of employees if any. However, small businesses can actually be quite large. According to the Small Business Administration (SBA), a public agency focused on helping small businesses, the number of employees or amount of revenue is what defines a business as small. The SBA utilizes a table of size standards to determine what criteria makes a business small. This table depends on the industry of the business. There are two ways to determine whether a business is small: yearly receipts (revenue) or number of employees. Most industries that are labor intensive are measured by number of employees. These are commonly manufacturing industries. The amount of revenue is typically used for industries that are more service related. These include, but are not limited to, construction and standard commercial services.

The North American Industry Classification System (NAICS) is utilized to determine the industry for the size standards. NAICS codes are assigned to different types of product or service industries, and these codes are utilized by small businesses to identify their industry. Some businesses can be considered small under one NAICS code but large under another NAICS code. For example, a construction contractor that also does single-family home construction and roofing contractor services would be participating in two different NAICS codes. Single-family home construction (NAICS: 236115) has a size standard of  $45 million. Roofing contractors (NAICS: 238160) has a size standard of $19 million. This means a business could both be a small business in an industry and not be a small business in another.

As shown above, multi-million-dollar businesses are still considered to be small. This is important because some industries are more difficult for smaller organizations to be successful. More difficult industries for smaller businesses are meant to be met with more lenient size standards. This is because there are some benefits to being a small business which helps them compete with large businesses.

Why are small businesses so important:

Small businesses are very important for the U.S. economy. Not only do small businesses make up a sizable share of total GDP, they are also large employers. Small businesses are more important than just numbers can suggest. They are the backbone of communities. Small cities and communities would not be able to function without small businesses keeping money within the local economy. Small businesses are oftentimes more connected with their customers, which allows for better service. Additionally, large organizations are not able to be as agile because there are more levels and logistics to consider. Small businesses are better able to cater to their customers’ needs.

Small businesses are also very innovative. Businesses with 5-9 employees received more patents per employee than any other business, and nearly double the patents received by large businesses in 2016. The success at innovation is largely because of their size. They are better able to connect with customers to find solutions for their needs. Large businesses oftentimes have too much of a disconnect from the salespeople connecting with the customers and the R&D departments.  This does not allow for new innovative ways to solve customer problems.

Small businesses help local economies more than large businesses. When spending money with a small business, most of that money will stay local. Local money can boost the city’s budget, household incomes, and the whole local economy. This is primarily why small businesses are so vital. Large businesses are far more widespread , and the profits do not typically get spent within the communities they operate. Corporations create value for shareholders, but that value does not get translated into better local economies. Large businesses are still positive for the economy as a whole, but they do not have the same local impact as small businesses.

How do we protect small businesses:

It is important to realize that small businesses have to be protected. Small businesses do not have large resources or market share. This means a large business can utilize its market power to drive small businesses out of business. All businesses have to start somewhere, and legacy businesses will try to stop new businesses from eating into their market share or profits.

Because of how hard it is to start a small business; there are some assistance programs. The SBA will help small businesses receive loans, and they will even guarantee part of these loans to help businesses succeed early on. A 7(a) loan with the SBA can be up to $5 million.  For a small business, loans and guarantees can be the difference between success and failure. Additionally, federal procurement strongly favors small businesses. Contracts less than $350,000 are automatically reserved for small businesses according to the Federal Acquisition Regulation. Additionally, larger government contracts must include favorable small businesses terms which require small business subcontracting plans. These are intended to help small businesses with federal procurement.

Ultimately, the best thing that can be done for small businesses is to choose to do business with them over large businesses. Better service and supporting the local economy oftentimes make up for potentially higher costs. The impacts of small businesses can be felt in your day-to-day lives, and small businesses truly are the backbone of the U.S. economy.