Industry Market Trends

Are Big Companies the Answer to Small Business Growth?

Mar 12, 2013

While they may seem to inhabit two different worlds, small businesses and major corporations are often entwined in symbiotic financial relationships. In fact, support from large companies may be the secret to reinvigorating and expanding the U.S. small business sector.

About 99 percent of all independent companies in the U.S. employ fewer than 500 people. Small to medium-sized businesses (SMBs) employ a majority (52 percent) of American workers, according to the U.S. Small Business Administration. Smaller companies are critical to the U.S. economy, generating jobs and revenue, and when they experience a downturn, so too does the nation.

Small businesses have created a disproportionate share of new jobs in recent decades, and at the same time, they have been important players in pulling the nation out of recessions. However, today, many small businesses are freezing their hiring and expansion plans as consumers spend less and growth is more uncertain. This doesn't bode well for a strong economic recovery.

Some analysts are looking to the symbiotic relationship between large enterprises and SMBs for a boost to the latter's business. Large enterprises, of course, spend billions of dollars each year purchasing products and services from smaller companies.

There is evidence that the more contact a small company has with a large enterprise, the more profitable the smaller company's business becomes. In fact, according to a recent study by the Center for an Urban Future, seven out of 10 SMBs increased both their revenue and their payrolls within two years of becoming part of a larger corporate supplier base. The study, "Breaking into the Corporate Supply Chain," interviewed more than 200 small American companies.

When a smaller company interacts with large enterprises, the small business ushers in changes that improve its overall organizational structure, management practices, and operations. In order to serve larger customers, it may upgrade its technologies and increase efficiencies to meet service-level demands. Following this pattern, many small businesses see greater financial success and, as a result, can hire new employees and seize growth opportunities.

There are other benefits, as well. Small companies that have large enterprises as customers often find that credit is easier to obtain. The transfer of knowledge is greater, too, with larger companies often "spilling over" new knowledge, innovative ideas, and business models to their smaller partners, allowing the smaller companies to become fitter, more flexible, and more forward-thinking.

The numbers bear this out. The Center for an Urban Future found that small businesses that supply larger corporations tend to have higher revenues. About 63 percent of companies that serve as suppliers to large corporations earn more than $500,000 annually. Meanwhile, more than three-quarters (77 percent) of SMBs that do not have large corporate clients report annual revenues of $500,000 or less.

Even the employment numbers are telling: SMBs that supply large companies saw their headcounts increase, on average, by 164 percent in the two years following the acquisition of large accounts.

These benefits also extend in the opposite direction. Smaller companies are generally more flexible in meeting corporate needs, more willing to try new things, and in better possession of local knowledge, which can help large partners attempting to enter new markets.

Large Multinationals Give Back

Many larger companies are recognizing the benefits of maintaining close relationships with smaller shops. It's not unusual today to see global organizations introduce mentoring programs for small businesses, particularly since the latest recession.

In 2009, Goldman Sachs introduced its 10,000 Small Businesses campaign. Coffee giant Starbucks accepts customer donations to help finance its small-business loan program. The New York Stock Exchange offers a program to pair small businesses with large corporations. Dell offers its Innovators Credit Fund program, a financing initiative that provides entrepreneurs up to $100 million in the financial and technology resources they require to move their companies forward. Google regularly offers grants to innovative new start-ups.

Several multinationals, including Wal-Mart, Chase Bank, and Staples, have recently run contests that awarded small businesses with opportunities for retail distribution, capital and office equipment.

Of course, there is something else that large corporations can do to help small businesses: pay their invoices on time. In recent years, many large companies have rewritten the rules for paying their smaller suppliers, according to the New York Times.

A significant number of large companies - even those that aren't cash strapped - have used the recession as an excuse to change payment terms for invoices from 30 to 60 days, often leaving their smaller partners scrabbling for operating income. The Times names Apple, Wal-Mart, Ford Motor Company, and Costco as major culprits in this practice.

While most small businesses are well aware of the benefits that come from a relationship with a multinational, the challenge going forward will be to help multinationals recognize the benefits SMBs can provide in return. As large organizations watch their customers buy less often and spend less money due to economic uncertainty, they will hopefully recognize that helping the small-business sector will benefit everyone.