May marks Small Business Month in the United States, and there’s plenty to celebrate. For a start, small firms make up the vast majority (over 99 percent) of all businesses in America and provide jobs for tens of millions of people (“nearly half of all U.S. employees are employed by a small business,” notes a Forbes.com article posted earlier this year).
Small businesses range from mom-and-pop corner convenience stores to high-tech startups run by computer geeks with dreams of becoming the next Microsoft Corporation. Small businesses can be organized as a sole proprietorship, a partnership, a corporation, or other legal entities.
If small businesses come in a variety of formats and offer different goods and services, some hard and fast rules do apply to the sector. To qualify as a small business, a firm must be independent and have fewer than 500 employees, states a March 2023 report from the Office of Advocacy with the U.S. Small Business Administration (SBA).
A federal agency, the SBA was established in 1953 to assist fledgling firms with loans, resources, and opportunities.
By the SBA’s definition, there are more than 33 million small businesses in the U.S., versus 20,868 large businesses. Over 80 percent of these small businesses (totalling 27.1 million firms) are one-person operations with no staff (“non-employer firms” as the SBA calls them). “Employer firms” by contrast do have paid staff, though usually not many of them. Roughly 5.4 million small businesses have “between one to 19 employees” while “only 647,921 businesses have a workforce size ranging from 20 to 499 employees,” states Forbes.com.
Small businesses punch above their economic weight class in terms of revenue, generating roughly 43.5 percent of Gross Domestic Product (GDP) in America. And, miniscule as their workforces might be, small businesses are also efficient job creators.
“From 1995 to 2021, small businesses created 17.3 million net new jobs, while large businesses created 10.3 million. Small businesses have accounted for 62.7 percent of net new job creation since 1995,” states the Office of Advocacy.
The advent of COVID, which became a pandemic in March 2020, briefly threw a wrench in the job creation capabilities of small business. Some 8.6 million job losses were recorded among small businesses in Q2 2020, “however, small business employment grew quickly after the COVID-19 recession,” states the Office of Advocacy. Over six million small business job gains were recorded in the months following the 2020 dip, adds the report.
In 2019, just under 20 percent of all employer firms were owned by minorities (this works out to roughly 1.1 million small businesses), states the Office of Advocacy. Of these minority-run firms, “6.2 percent were Hispanic-owned, 2.4 percent were Black-owned, 10.4 percent were Asian-owned, 0.5 percent were American Indian or Alaska Native-owned, and 0.1 percent were Native Hawaiian or other Pacific Islander-owned,” reports the Office of Advocacy.
In terms of gender, men still predominate. Women owned approximately one fifth of all employer firms (amounting to 1.2 million companies) in 2019. When it comes to very small, one-person firms, however, things look considerably different. “Women owned about 10.9 million non-employer firms in 2018, or 42 percent of all non-employer firms, putting them closer to parity with men,” notes the Office of Advocacy.
Age-wise, plenty of elderly people own small businesses, compared with Millennials and other comparative youngsters. “According to Census Bureau data, the share of self-employed (incorporated or unincorporated) age 65 and over increased from 14.1 percent in 2013 to 17.1 percent in 2021, while those under age 30 had only a slight increase, from 7.1 percent to 8.1 percent. Over 9.4 percent of workers were self-employed by 2021,” states the Office of Advocacy.
In a piece posted online in late 2013, the U.S. Chamber of Commerce identified five major challenges currently facing small business: inflation, access to credit, rising interest rates, supply chain disruptions, and hiring and retention.
Inflation is the current bugaboo among consumers, but its impact reaches far beyond shoppers grousing about the price of gas and groceries. When faced with cost increases, small business owners must raise prices (which hurts consumers) and/or cut expenses (which hurts the paid staff of the small business, and the business itself), notes the U.S. Chamber of Commerce. Small businesses usually have very thin profit margins and small reserves of capital, magnifying the effect of any price increases.
“Inflation disproportionately impacts small businesses, which have less leverage when it comes to buying power compared to their larger counterparts,” adds the U.S. Chamber of Commerce.
In a similar fashion, small businesses generally have a more difficult time getting access to credit than corporate behemoths.
“A survey [released in May 2023] by Goldman Sachs found that more than three-quarters of small business owners are concerned about their ability to access capital. ‘Just a year ago, 77 percent of respondents said they were confident about their access to capital. Now the tables have turned with the same percentage citing concern,’ reported the investment bank,” stated the U.S. Chamber of Commerce.
In general, big banks are more receptive to pleas for cash or credit when they come from the CEO of a large corporation over, say, the owner of an independently run hot dog stand.
Rising interest rates remain a grave concern as well. Over three-quarters of small businesses say that, “rising interest rates are limiting their ability to raise capital or financing for their business. The spike is also stunting growth, as 50 percent of small businesses report that they have delayed plans to grow their business due to rising interest rates,” states the U.S Chamber of Commerce.
The lingering effects of the COVID pandemic continue to wreak havoc on established supply chains for all companies. A fifth of small businesses identified supply chain issues as a top concern, says the U.S. Chamber of Commerce. Once again, the difference between big and small business comes into play: “While larger enterprises have found ways to work around blockages in their supply chains, small business owners don’t have the same financial flexibility,” notes the U.S. Chamber of Commerce.
Some small businesses, like big corporations, have tried to ease supply chain disruptions by switching to domestic suppliers. While North American-based suppliers typically charge more than their offshore competitors, they don’t have to ship their wares across oceans and through congested ports.
Hiring and then retaining employees also remains tricky. Low overall unemployment in the United States means there’s a smaller pool of potential staff. Citing a Q3 2023 Small Business Index study, the U.S. Chamber of Commerce said over half of small businesses found it “challenging to keep up with their employees’ salary expectations or demands,” while research from the Office of Advocacy backs up many of the Chamber of Commerce’s observations.
“In 2020, the most significant challenges for small business were hiring and supply chain challenges. 40.3 percent of firms were looking to hire employees and 24.2 percent sought to identify new supply chain options in April 2022,” states the Office of Advocacy.
All of these challenges underscore the risks inherent in running a small business.
Indeed, the failure rate for small business is high: “From 1994 to 2020, an average of 67.7 percent of new employer establishments survived at least two years. During the same period, the five-year survival rate was 48.9 percent, the ten-year survival rate was 33.7 percent, and the fifteen-year survival rate was 25.6 percent,” notes the Office of Advocacy.
In 2020, approximately 1.07 million small businesses were launched, and 1.02 million were permanently closed, adds the Office of Advocacy.
Given all this, why would anyone want to own and operate a small business?
Well, as it turns out, small business ownership has its upside too. Benefits include independence, power and control, flexibility, financial gains, and passion and creativity, states a piece last updated October 24, 2023, on the website of Business News Daily (a self-described online authority “for startup and early stage business owners”).
The independence factor is obvious: “When you own the business, you are the boss. You do not have to rely on others or discuss decisions with them. The independence that comes with entrepreneurship is great for those who like to work autonomously,” notes Business News Daily.
Power and control means the ability to set rules, hire or fire people, and establish the workplace culture—an ideal situation for entrepreneurs who chafe under the authority of a boss.
Flexibility refers to deciding your own hours. While stores and restaurants generally have to keep consistent, customer-oriented hours, other types of small businesses such as tech startups don’t face such constraints, and can work through the night and close up during daylight hours if they choose.
Financial gain might not always be obvious, but it’s worth noting that some massive corporations originated as tiny enterprises operating out of the owner’s garage or a back room in their house.
Finally, passion and creativity enable a small business owner to pursue their dreams.
There’s also the added bonus of knowing you are part of a vital economic sector. “While giants in technology and multinational corporations often capture the public’s attention, it’s small businesses that form the crux of the American economy,” notes Forbes.com.
