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Is Small Business at a Crossroads

In my browsing this morning, I came across this article from the Federal Reserve Bank of Atlanta - Prospects for a small business-fueled employment recovery.  Here is a quote from a speech given by William Dudley of the Federal Reserve Bank of New York. 

"For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector."

Whether you work in a small business or patronize one, it is an important article to reflect upon. Look at this chart that I've posted from the article and especially the results from 2007-2008.

Distribution of net gain-loss in employment

Job losses from late 2007 through 2008 were 43% from businesses with less that 50 employees.

Let me pose a question. What if 43% of the stimulus money went to these small businesses. What do you think would have happened? Do you think those dollars would be sitting in a bank? I don't think so either. They would have been spent, and real stimulus and real economic strength would have been built.

Having spent the last fourteen years working with small businesses as an organizational consultant, my perspective is different than Washington's. I take a micro, localized view of the economy. Global businesses are not really global, but a collection of local economic operations. There maybe a global headquarters, but it nothing but a building with offices. The real economic engine of those companies is local. The global nature of them makes them efficient. But they are still localized operations where people go to work, pick up their pay check, deposit it in the bank and pay their mortgage, bills, insurance and buy food and other necessities for their families.

We live in a networked age. A local jewelry maker in Indonesia can sell her product line to customers in the US or Europe. She can because of the internet and the global reach of package companies like UPS and FedEx. Here a smart business person on one side of the world can have a successful company selling to people in a nation where 43% of the job losses in one 15 month period were from businesses virtually the same size as her's. What does this tell you about the business climate in the US today?

Linked is a New York Times article - Are Medium-Size Businesses the Job Creators? - that suggests that we should change the way we look at business size. Look at this chart from the Bureau of Labor Statistics that was included in the article.

NYT job creation chart.chart

Source: Bureau of Labor Statistics (Numbers do not total 100 percent due to rounding.) Job Creation by Firms of Different Sizes, 1992-2008

What should those of us who are small business owners and serve small businesses take away from these two articles?

1. Scale matters. The most productive small companies in regard to job creation are those between 50 and 500 employees. If you are starting a business today. You should consider as a part of your business planning process what it would take to reach that threshold of 50 employees. In a number of client situations, the idea came to me that many of their problems would be solved by being just a little bit larger. Then the scale of costs would be more favorable for them.

What if you don't want to grow that large? What are you alternatives?

2. Collaboration leverages size for small businesses. Becoming a collaborative partner with other business provides a way to be big while remaining small. The skills and perspective required to be a good collaborator are not the same as being good at running a small business. 

What if you feel like you've reached a crossroads, a transition point, in both your business and professional life?

3. Impact determines what business you are in rather than the activities that you do.  To be successful today requires a change of mind about what business you are in. If you are in the business of providing the same products and doing the same services over and over again for customers, then you may find yourself irrelevant and out of business. However, if you understand the impact you want to create, then you can change your business and/or employment status to put yourself in the best possible position to achieve that impact. If this means that you close your small business and go to work for a medium size one, then that is what you do. In so doing we become a mission-driven workforce, rather than a job activity driven one.

My main concern is the lack of recognition by Washington of the situation of small business. This isn't a Democrat/Republican, or Bush/Obama issue. It is a national issue that is impacting people, families and communities across our nation. 

What if these are not my issues? What can I do to make a difference?

4. Support local small business groups in your local community. In most communities there is an economic development agency. Check with them and offer support to helping attract and support new business. Check and see if there is a local chapter of SCORE where you live. Offer to teach a class on some aspect of being a small business. Check and see if there is a micro-enterprise organization in your community. Each of these organizations provide help and support to small business. Get involved and you'll be strengthening your community.

Is small business at a crossroads? Based on these job numbers, I'd say yes. Support your local small business while we learn to make the changes that are necessary to survive in a very tough climate for business.

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