We have often heard that small businesses (up to 500 employees) are the life blood of job creation in America.
Per data from the Small Business Administration (SBA) that is derived from the Bureau of Labor Statistics and Business Employment Dynamics, since the end of the Great Recession in June 2009 through the end of 2017, small businesses were responsible for 8.3 million jobs with 5.1 million of them had in the private sector.
That’s roughly 62% of all private sector jobs created during that time frame and mirrors the historic rate of small business job creation over the last 25 years.
The interesting thing about data is that when a new set of eyes examines it, new revelations can be had. That was the case with small businesses and job creation in the report, “Small Business Administration and Job Creation” published by the Congressional Research Service.
Inside that report were findings from a number of different studies on the topic of small business and job creation. One study found “the major part of job generation and destruction takes place in the small firm sector, and small firms provide the greater share of net new jobs.”
Another found “that about 20% of all startups close in their first year, one-third close within two years, and fewer than half of all startups are still in business after five years.” Interestingly, a study from the Census Bureau, based on employment data from 1998-2011, found that “young firms, defined as firms in their first two years of existence, have higher job creation and job destruction rates than older firms, higher rates of net job creation than older firms.”
Putting these studies together suggests that if more small businesses were able to make it past their first two years, there would likely be more jobs created. According to Small Trends, among the top 10 challenges that small businesses face are government regulations, the economy, Federal income taxes, cash flow and hiring new employees.
The current administration in the White House helped small business on the government regulation and income tax front, which in turn has helped reduce the economic risk they face. Per the NFIB’s September Small Business Optimism Index, hiring qualified and skilled workers remains a problem - “Sixty-one percent of owners reported hiring or trying to hire, with 87 percent of those reporting few or no qualified workers. Thirty-eight percent of owners reported job openings they could not fill in the current period, unchanged from last month.”
With an unemployment rate of 3.7%, we are seeing employers, including small businesses begin to raise compensation to help fill those vacant slots. Others are understanding they will need to train workers, so they develop the necessary skills.
These issues are exacerbating the cash flow issues that small business, particularly young ones, face and it’s a given that young, small businesses can have a difficult time getting a traditional loan. There are alternatives to be had through companies such as LendingClub (LC), Upstart, Prosper and other online portals that facilitate loans to businesses and individuals.
Another alternative is found with those companies that provide cash advances on future account receivables, better known as merchant cash advances (MCA). In truth, these are not loans but rather legally binding agreements between the provider and the recipient to sell future accounts receivables to the provider in exchange for an up-front payment. In other words, the MCA company (the buyer) is purchasing the future revenue of a business (the seller) at a discount. As with any form of financing, the fees tend to be in a range that reflect the strength of the seller’s business and other factors, but an MCA is an alternative to the lengthy approval process and strict credit requirements required for a traditional term loan.
While most businesses would prefer a traditional loan if they can get it, if we want the economy to continue to grow that means providing small businesses access to capital so they can successfully navigate through their early years. The more small business that are able to do this, the more jobs to be had, which in turn fuels the economy.
The one thing that could stop the current small business expansion is local, state or the federal government.
If the fall elections put in power politicians who want to hike taxes or layer on regulations that hit small business access to capital, that would slow the economy.
Whether a small business secures funds through loans or newer and quicker instruments, like the merchant cash advances, any attempt to impose more government regulatory red tape will end up costing jobs, wealth and growth.
Christopher (Chris) Versace is the Chief Investment Officer at Tematica Research, editor of the newsletter Tematica Investing, co-host of the Cocktail Investing Podcast and is a featured columnist to The Street.com as well as a contributor to Business Insider and Forbes.com.
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