Written by Jason Rittenberg, Director of Research & Advisory Services for the Council of Development Finance Agencies.
Incubators. Microlending. Accelerators. Crowdfunding. From rural areas to large cities, from the middle of the country to the coasts, today’s economic development entities — and their jargon — are all-in on encouraging small business finance.
Communities are increasing their support with good reason. Small businesses account for more than 99 percent of firms, 49 percent of employment and 42 percent of payroll in the country. Further, small business lending continues to struggle out of the recession. While overall business lending is up nearly 25 percent from 2008, bank loans of less than $1 million remain down 14 percent over the same period.
So communities are focused on helping small businesses, and from a constituent and need perspective, it makes sense for them to do so. But what does it mean to “help” a small business? For that matter, what is a “small” business? The answers to these questions are actually complex.
The U.S. Small Business Administration (SBA) defines a small business as having fewer than 500 employees, covering 99.7 percent of all firms. However, 90 percent of firms have fewer than 20 employees, and 62 percent have fewer than five. The difference in sophistication, goals and needs of a business with no employees is vastly different from a business with 10 employees, which is again exponentially different from a firm with 200 employees. Infusionsoft put together an infographic in 2012 to help illustrate these differences.
Given this variation, communities looking to support small businesses of any stripe need to think strategically about their economic development goals and needs before proceeding. Development finance programs require non-trivial commitments of resources to be effective and should therefore be entered into only as part of a comprehensive regional strategy. At the organization I work for, the Council of Development Finance Agencies (CDFA), we refer to this approach as the “development finance toolbox.”
In the area of small business access to capital, CDFA has seen a wide variety of city and state programs be successful. Technical assistance, seed and venture capital, credit enhancement, and lending programs — as well as incubators, microlending and other trendy solutions — can all contribute to small businesses in different ways. The keys to success are to match the right program to real community needs and to find the right partners to assist in implementation.
Small business needs, foundational finance programs, and innovative support programs are all being covered as part of the Providing Small Businesses with Access to Capitalforum being held in Kansas City, MO on October 8-9, 2014. Economic development, small business development, and other city staff are encouraged to participate in the event to learn about the latest and best practices for encouraging this critical sector of the local economy.
About the author: Jason Rittenberg is the Director of Research & Advisory Services forCDFA. He oversees numerous projects, including the State Small Business Credit Initiative Coalition, and is the course advisor the CDFA Intro Revolving Loan Fund Course.