Why are American Small Businesses So Large?
The recent outcry around large publicly traded companies receiving SBA loans intended for small businesses has highlighted a problem with the definition of small business in the US: Small businesses are any businesses that aren’t huge. In fact, the SBA reports that 99.9% of US businesses are considered small. To put that in context, of the more than 30 million businesses in the US, only around 30,000 of them would not be considered small (more info on SBA size standards here). The current definition of small business defeats the purpose of making the designation and is harmful to actual small businesses.
Insufficient Federal Resources
The Small Business Administration exists to support small businesses in the US. The debacle with the PPP & EIDL programs has illustrated that a mind-boggling amount of money is needed to support even a small portion of 30 million businesses in an emergency. Crisis aside, even some BONM (back-of-the-napkin math) shows that the SBA is under-resourced. If the agency needed to guarantee loans of as little as $10,000 for 5% of existing US small businesses it would need $15 billion. The entire SBA budget request for fiscal year 2020 was $820 million with a relatively meager $177 million dedicated to disaster loan programs (source). With a base of 30 million businesses the SBA is not resourced to adequately support them in the best of times let alone the worst.
Inadequate Disaster Response
Normally the SBA has rules that disqualify franchises and companies with certain affiliations from receiving SBA disaster funding. The CARES Act created exceptions that opened the door for several large, publicly-traded companies to take advantage of low-interest PPP loans; this also increased the pool of businesses served by the SBA.
Large companies receiving millions of dollars in loans only sped up the rapid exhaustion of PPP funding; the program ran out of money almost immediately, reportedly approving only 1.6 million loans, which represents roughly 5% of US small businesses. With small business being defined so broadly large scale support for disasters impacting the small business ecosystem falls woefully flat.
Minorities Left Out in the Cold
While demographic data is not available on PPP recipients, advocacy groups are already raising concerns that minority-owned businesses (MOBs) have been disproportionately excluded. According to the Minority Business Development Agency, MOBs are three times more likely to be denied loans from a commercial bank; it would not be a stretch to conclude that the early decision by many commercial banks to limit PPP applications to existing loan holders meant fewer MOBs receiving the rapidly-depleting funds.
By having less access to capital minority business owners are more likely to experience funding shortfalls which makes them significantly more vulnerable to disruptive events like natural disasters and large economic disruptions. A small business support system that favors businesses with more access to capital hurts smaller businesses and disproportionately excludes minorities.
What Should We Do About it?
A definition of “small business” that includes both an independently-owned local pub with 10 employees, and a publicly-traded restaurant chain with 10,000 employees is useless. A disaster support program that treats these companies as if they are the same is problematic. I don’t have the answer to the question of why some small businesses are so large, but I’m hoping we can at least start asking the question.
