NEWS - Editorial & Opinion

Editorial: New Definitions of "Small Business" Needed

It’s widely understood that “small business” owners have created the majority of the jobs in the U.S. for years. And if “small businesses” do not start creating jobs, the recession will never end.

It will never end…unless the definition of “small business” is changed.

What is a “small business” in the eyes of our federal and state government?

For many governmental entities, a company that employs less than 100 people, usually privately owned, is defined as a small business.

For the Security and Exchange Commission purposes, “small businesses” are defined as domestic companies with revenues of less than $25 million. In Savannah, we would define that as one of the area’s major employers.

According to the IRS, for the new Health Care insurance legislation passed this year, a “small business” is an employer with fewer than 25 full-time equivalent employees (“FTEs”) during a tax year, with the average annual wages of its employees less than $50,000 per FTE.  A company with 25 employees at an average salary of $50,000, has a $1,250,000 gross payroll, and pays another $125,000 in payroll taxes and required benefits for a total of $1,375,000 in basic labor costs. At 40 percent labor costs, a company with $1,375,000 in base labor costs is doing more than $3 million in sales. NOT small.

The Small Business Assistance Administration (SBA) of the federal government defines “small business” based on the industry. For example, for various types of farms, a "small business" is defined as having sales of less than $750,000. However, for the fish hauling business, it is a company with under $4 million in sales. For many construction categories, if you have less than $33 million in sales, you are defined as a small business. The SBA also uses the number of employees to define a small business for most of the business categories. For the majority of categories you can have between 500 to 1,000 employees and you're a "small business."

The Federal Reserve Board does a survey of “small business” finances every five years, called the SSBF. The last one was done in 2003, however, and their definition of a “small business” was companies with less than 500 employees. Are they kidding us? Are they making decisions based on that type of data?

It appears they are. Just a little over a month ago, in late June 2010, the Office of Advocacy of the Small Business Assistance Administration completed a study entitled “Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances,” written by Rebel Cole.
The first paragraph of the Executive Summary on page three says it all: “In this study, we use data from the Surveys of Small Business Finances (SSBF) to provide new information about the use of credit by small businesses in the United States. More specifically, we first analyze firms that do and do not use credit; and then analyze why some firms use trade credit while others use bank credit. We find that one in five small firms uses no credit, one in five uses trade credit only, one in five uses bank credit only, and two in five use both bank credit and trade credit. These results are consistent across the three SSBFs we examine—1993, 1998 and 2003.”

They used a study that is seven years old!

And, why? Because there was no recent data source within the federal government, we would have to surmise. And if we spent three hours on the phone trying to find the right person to talk to, we would probably find that the study that would have been released in 2008 didn’t get funded by Congress or the Bush Administration.

Paragraph two of that same report is the best part, however, stating, “When compared to firms that use credit, we find that firms using no credit are significantly smaller, more profitable, more liquid and of better credit quality; but hold fewer tangible assets.”

So...maybe extending us credit isn’t the issue.

The core problem, however, is that a company with 25 to 100 employees is NOT small, not in Savannah, GA., or any other city in America, and a new approach to working with those who are truly able to create jobs must be formulated.

A true “small” business – the kind that is going to create jobs around here – currently has 10 W-2 employees or less. And the owner who used to have 20 employees and is now down to 10 or less can’t qualify for loans, because even though they are incorporated, they were required to personally guarantee bank loans or credit with their major vendors and suppliers. Incorporation provides little protection.

Their personal credit rating has been severely damaged by the collapse of the U.S. economy that hurt their company, so now – no matter their positive cash flow – they can't get loans or trade credit. Compounding this is another reality that small business owners are also living with – they haven't been able to pay themselves a decent wage for years, compounding their credit rating problems. They pay their company's bills and their employees first.

All those loan programs now touted constantly "to aid small businesses" are useless because the banks don’t just look at the profitability and cash flow of the corporation, they look at the owner. And the owners no longer qualify.

Why is that? Do you think the credit rating of the president of General Motors was affected by the slow payments and defaults of GM? Do you believe that the president of a major corporation in our region whose company filed bankruptcy and stuck a banking group with $274 million in losses – along with the stockholders of those banks – do you think their personal credit has been hurt?

This is just one of the problems that must be addressed to re-charge actual “small businesses corporations” who WILL create jobs for America if regulations and strategies are put in place to truly help.

Bottomline: there needs to be new definitions, using terms such as “Micro-Businesses” and “Mini-Businesses,” in regulations and law, with valid research on what’s really going on in our world.