Small Business Research

Summary

Small businesses are defined as privately owned and operated companies employing a small number of workers. In the United States, the legal definition of a small business is determined by a set of criterion specified by the Small Business Administration. Generally, those criterion mean that a manufacturing business with fewer than 500 employees or a non-manufacturing business with less than $7.5 million in revenue will be considered a small business by the U.S.A. [1] Alternatively, the European Union defines a small business as a firm with fewer than 50 employees.[2] Small business are pervasive throughout the United States and other countries. Typical examples of small businesses include: freight truckers, residential builders, exterior contractors,and architectural contractors[3]. According to the SBA there are approximately 28 million small businesses in the United States that comprise 55% of all US jobs. Furthermore, the number of small businesses in the United States has increased by approximately 49% since 1982.

The Small Business Administration

Created in 1953 as an independent agency of the federal government, the Small Business Administration (SBA) has two strategic goals: first, growing businesses and creating jobs, and second, to serve as the voice for Small Business. SBA claims that the core of their entrepreneurial development is the foundation of targeted, effective advising, training, and mentoring services to drive business. Their entrepreneurial development performance goal focuses on driving greater participation in the resource partner advising and mentoring programs and training courses. The SBA primarily offers a range of financial assistance programs for small businesses that may have trouble qualifying for a traditional bank loan. The SBA guarantees $65 million in loans to small businesses through its two major loan programs, 7(a) and 504. Follow this link for a list of the major SBA Loans. SBA's programs also include financial and federal contract procurement assistance, management assistance, and specialized outreach to women, minorities and armed forces veterans. SBA also provides loans to victims of natural disasters and specialized advice and assistance in international trade. [4]

Agencies affiliated with the SBA include: Small Business Investment Company (SBIC), Small Business Innovation Research (SBIR), and Small Business Development Centers (SBDC).

Contact

Answer desk: answerdesk@sba.gov

Houston office: houston@sba.gov

Office of Chief Information Officer: (202-205-6708)

Office of Performance Management and the Chief Financial Officer: (202-205-6449)

FY 2016 Entrepreneurship Goals

Official Goals of the Small Business Administration

• Broad goal: Strengthen entrepreneurial ecosystems through a variety of strategic partnerships to provide tailored training, mentoring, and advising services that support entrepreneurs during every phase of their business growth.
• Performance goal: reach 1.4 million clients with online and in-person training, mentoring, and advising in FY 2016.
• Programs offered: Small Business Development Centers, Women's Business Centers, SCORE, Learning Center, Boots to Business, Regional Innovation Clusters, Entrepreneurship Education, Emerging Leaders
• Strategies:

1. Harness SBA's nationwide network of resource partners
2. Improve entrepreneurial ecosystems through cross-agency and public-private partnerships
3. Offer tailored training through structured programs and online access

Budget

SBA's total budget request for FY 2016 (including Stafford Act Disaster funding) is $860 million. Of this amount, $3.3 million is for business loan subsidy, $19.9 million for the Office of the Inspector General and $9.1 million for the Office of Advocacy. This total is inclusive of $28 million for administering non-Stafford Act disasters. [5]

Some 2016 budget reforms include:

• Launch SBA One, a program designed to increase loan efficiency process
• Allocates $3 million towards "idea lab" which will help adopt private sector best practices

For further detail, see SBA Budget Graphs.

Criticisms

The most prevalent criticisms of the SBA include [6]:

1. Creates uneven playing field by aiding some businesses while denying aid to others, thus distorting markets;
2. Duplicating activities already provided in private markets;
3. Harms businesses and consumers;
4. Government intervention in deciding market trends can often bet on the wrong companies at taxpayer expense;
5. SBA fosters corruption.

Specifically,

• GAO released Report 10-108 which found that failing to hold firms accountable sent a message to the contracting community that there is no punishment or consequences for committing fraud. See the report for more information.
• The SBA has difficulty in SBA Lender and Loan Oversight.
• The CATO Institute argues that the very conception of the SBA was a bad idea, questioning the federal government's strategy in intervening in the credit market. They say that the United States grew to be an economic powerhouse with a small centralized federal government that largely left business development to the private sector. For more information about the CATO institute's criticism, see this article.

Issues Facing Small Businesses

Health Care

The Patient Protection and Affordable Care Act was passed by Congress and signed into law by President Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act of 2010, the law completely replaced the existing health care system in the United States, by expanding Medicaid and Medicare, and mandating all individuals to sign up for health insurance coverage through a Qualified Health Plan (QHP's must be offer affordable and comprehensive coverage - either privately or publicly funded). Here is a link to the complete text of the PPACA and the Health Care and Education Reconciliation Act.

One concern with the Patient Protection and Affordable Care Act is that “Obamacare” will kill Small Business [7]. Obamacare's effect on small businesses is not necessarily seen in the abandonment of plans to grow businesses or death of businesses themselves, but rather, in a slowing or halting in hiring, as well as a cut in employees hours. According to a Gallup and Wells Fargo survey of 600 small business owners conducted in 2012, 48% of small business owners point toward "potential healthcare costs" as a reason for not hiring more employees [8].

Still, while the ACA may have caused a slowing or ceasing in small business hiring practices, the exact harm of Obamacare regulations and mandates to small businesses depends heavily on small business size because the effects vary so greatly between firms of different compositions and sizes in their workforces (i.e. number of full time employees, average wages, state of operation).

The SBA has established a summary of size guidelines for small businesses to qualify "as a small business concern for SBA and most other federal programs" [9] (500 employees for mining and manufacturing businesses or an annual receipt of $7.5 million in average annual receipts for non-manufacturing firms), but these small business standards vary between industries. The United States has almost 6 million small businesses that fall under small business size classifications; however, 90% of small businesses employ fewer than 20 people [10]. More precisely, 61% of firms have between 3 and 9 employees, while 98% of firms employ between 3 and 199 employees. [11]

According to the ACA, small businesses with fewer than fifty full-time equivalent employees are exempt from the employer mandate. At the time of the ACA'S enactment in 2012, only 200,000 small businesses would have been affected by the employer mandate, as 96% of the small businesses employed fewer than 50 employees [12].

Furthermore, while the cost of insurance premiums and plans have assuredly risen post-ACA, health insurance premiums have been increasing due to rising health care costs for many years (prior to the act's enactment) [13] [14].

Access to Capital

Since the Great Recession of the late 2000’s, small business owners have encountered difficulties in getting access to capital. This difficulty has a pervasive effect on small business owners’ ability to not only start, but grow. Small business owners have, when surveyed, indicated that sparse access to capital is the primary threat to their operation. Slimming credit availability, rising student debt, and changing landscape in the loaning market have significantly contributed to an industry-wide decline in access to capital for small business.

Student Debt

Rising student debt[15] may be stifling small business growth[16].

• Researchers at the University of Pennsylvania have discovered that start-ups and small businesses account for approximately 60% of net employment activity in the United States.
• According to a Gallup poll conducted in February 2015, one of the biggest hurdles these companies and new entrepreneurs face, is identifying and accessing the capital to finance their ventures.
• Following the financial crisis of 2008, it's no surprise that the top funding source for new business remains the personal savings accounts of founders.[17]

Personal debt therefore, becomes an integral component of the financing equation in starting a small business. The strong negative correlation found in the Pennsylvania study cites student debt as a possible contributor to declining small business growth[18].

Patent Reform

Innovation Act: The full title of the act is "To amend title 35, United States Code, and the Leahy-Smith America Invents Act to make improvements and technical corrections, and for other purposes." GovTrack predicts that the Innovation Act has a 36% chance of being enacted. Representative Bob Goodlatte intends for the bill to cut down on abusive patent litigation and strengthen a patent holder's rights. The Innovation Act also proposes certain reforms to the enacted Leahy Smith America Invents Act.

The bill will target the following areas :

• Abusive patent litigation.
• Increasing transparency and reducing weak patent infringement claims.
• Clarifying patent litigation procedures and practices.
• Bolstering IP centered small businesses.
• Reducing referrals to random courts for the review of patent cases.
• Weakening power of Patent Trolls.

Protecting American Talent and Entrepreneurship (PATENT) Act: The full title of the bill is "A bill to amend title 35, United States Code, and the Leahy-Smith America Invents Act to make improvements and technical corrections, and for other purposes." GovTrack predicts the PATENT Act has a 36% chance of being enacted. The bill is currently bipartisan with 3 Republican and 3 Democrat sponsors.

The House Innovation Act and Senate Patent Act are very similar. Both acts address abusive litigation. Members of the Senate Judiciary Committee want to reduce frivolous lawsuits, eliminate vague demand letters, and prevent extortion by passing the Patent Act. The act focuses on the following areas :

• Increasing transparency on patent information and claims.
• Reducing litigation costs.
• Discouraging abusive litigation practices.

Further Reading

• The Small Business Administration: https://www.sba.gov/
• The Federal Reserve Board Survey of Small Business Finances: http://www.federalreserve.gov/pubs/oss/oss3/nssbftoc.htm
• Trends in Small Business: http://smallbiztrends.com/

References

1. http://www.gallup.com/businessjournal/186179/student-loan-debt-major-barrier-entrepreneurship.aspx

2. http://www.entrepreneur.com/article/237926

3. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417676

4. http://www.gallup.com/businessjournal/181592/potential-entrepreneurs-aren-taking-plunge.aspx

5. http://www.forbes.com/sites/kauffman/2014/09/15/student-debt-and-the-millennial-entrepreneurship-paradox/#286763962f70

6. http://obamacarefacts.com/obamacare-small-business/

7. https://www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/summary-size-standards-industry-sector

8. http://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition/index_en.htm

SBIC

• GAO report on SBIC
  • GAO recommended that SBA provide guidance to SBIC on how to collect and report data on their investments in minority, women, and veteran owned businesses.
• Description of the SBIC Debenture Program

SBIR

• GAO report finds SBIR data reporting inadequate

Articles

Small Business Data

SBA and Data Reporting