How Small Businesses Make A Big Economic Impact
By Ben Luthi
Ben Luthi has been a freelance writer since 2013, covering all things money and travel. His work has appeared in many major publications and financial websites, including U.S. News & World Report, The New York Times, Fox Business, Experian, FICO and more. Ben lives in Utah with his two kids, and loves spending his free time traveling, hiking and talking about credit cards.
When it comes to the stock market, investors look to mostly large public companies to determine the health of the financial markets. But if you’re talking about the actual economy, small businesses are the backbone of America.
According to the U.S. Small Business Administration (SBA), there are 31.7 million small businesses throughout the country, employing 47.1% of the workforce. And among companies that exported goods from the U.S., a whopping 97.5% are considered small businesses.
Because small businesses are so key to driving economic growth, it’s in a community’s best interest to support them and help them thrive.
What Is a Small Business?
According to the SBA's small business size standards, there are a few different metrics used to determine if a business is considered “small” based on industry. For some, it’s based on how many employees the company has, and for others, the SBA uses the business’ annual revenue. Here are some examples:
- New car dealers: 200 employees
- Retail bakeries: 500 employees
- Dental offices: $8 million
- Full-service restaurants: $8 million
- Car washes: $8 million
- Beauty salons: $8 million
- Hotels and motels: $35 million
Because small businesses provide a significant contribution to creating new jobs and increasing rates of employment, the federal government provides benefits to support them, including incentives, tax breaks, access to inexpensive funding, and grants.
Exactly How Small Businesses Support the U.S. Economy
While small businesses make up a little less than half of total employment in the U.S., the Congressional Research Service found that they accounted for 63% of new jobs in the private sector between 2010 and 2019.
What’s more, of the more than 7.9 million employer establishments in the U.S., a staggering 5.4 million - about 68% - have 20 or fewer employees.
Small businesses tend to be more in tune with what consumers want and need in terms of products and services because they’re more likely to have one-on-one contact with their customers. They’re also more likely than larger companies to be adaptable to changes to the economic climate and consumer demand.
Finally, small businesses are often the most important drivers of local economic growth, primarily because they provide jobs directly to people in the community, use local goods and services and pay state and local taxes.
All of these factors go toward growing the U.S. economy as a whole.
Why It’s Important to Support Small Businesses
According to the Congressional Research Service's findings, small businesses hired almost two-thirds of new employees between 1998 and 2008. But because small businesses are more vulnerable to economic downturns, they accounted for 64% of the job losses during the Great Recession in 2008.
During the coronavirus pandemic, very few large corporations went under. However, nearly one-third of U.S. small businesses closed either temporarily or permanently, making clear that small businesses needed economic assistance to remain afloat.
As a result, there are several programs to provide assistance and funding for small businesses.
The SBA provides several different loan programs to small businesses of all shapes and sizes that qualify. That includes a microloan program that can be helpful for startups.
There are close to a thousand federal grants for small businesses, ranging across several industries and categories, which owners can search on Grants.gov. Additionally, state and local governments may also have grant programs for certain types of small businesses to help them thrive. Unlike loans, grants don’t require repayment, making them a great way to get funding.
If a small business doesn’t qualify for an SBA Loan or government grant, there are several other financing options available to support them. That includes venture capital, private equity, angel investors, short-term financing, and crowdfunding. Small business owners may even be able to leverage their existing assets to acquire financing through a bank or similar lender.
The Tax Cuts and Jobs Act of 2017 provided a significant benefit to small businesses with its Qualified Business Income deduction. With it, pass-through businesses, such as sole proprietorships, LLCs, partnerships, and S-Corps, may be able to deduct 20% of their qualified business income on their tax return. To learn more about this option for your business, consult your tax advisor or attorney.
How to Better Support Small Businesses in Your Community
While government programs, lenders, and investors can provide excellent assistance to small businesses that need it, it’s ultimately the consumers that drive demand for small business products and services. Here are some ways you can support the small businesses in your community:
Online and physical retail giants like Amazon.com and Walmart provide convenience and sometimes lower prices on products you might also be able to get from a small business. But if you can afford it, consider buying local goods and services instead. If you do choose to shop online, you’ll find that many retail marketplaces allow small business owners to sell their goods there too.
Write positive reviews
When you eat at a local restaurant or use the services of a small business and have a good experience, make sure to write a review, which could help encourage other consumers to become customers.
Follow your favorite businesses online
Social media is often an important way for small businesses to drum up new business. If you’re a fan of some small businesses in your area, following and interacting with them on Facebook, Twitter, and Instagram can help give them more exposure.
Check out crowdfunding campaigns
Websites like Kickstarter and Indiegogo provide platforms for small businesses to launch new products. In exchange for your “investment,” you’ll typically be one of the first to receive the product as an early adopter.
A Few More Ways to Support Small Businesses
During the coronavirus pandemic, there are some additional steps you can take to support local small businesses, including:
- Tipping generously
- Ordering take-out from local restaurants
- Buying gift cards or gift certificates for later use
- Stock up on items
- Create a directory of small businesses in the area to share with others
- Keep your memberships instead of canceling
Of course, some of these recommendations require some room in your budget. If you’re also in a difficult financial situation, it may be challenging to do some of these. Take stock of your situation and capacity to determine the best ways you can help.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.