Industry Market Trends

Which Small Businesses Create the Most Jobs?

May 08, 2013

The small business sector has traditionally been the main driver of U.S. job creation and growth, but its impact on the employment market has declined in recent years. Here we look at the types of small businesses that are still responsible for providing a significant share of new jobs and what can be done to support them better.

Job creation is on everyone's lips. Although major corporations receive a great deal of attention, the majority of American workers are employed by small businesses. There are more than 28 million small businesses in the U.S. today, employing about 52 percent of the workforce.

Economic recovery very much depends on the health of small businesses, and they are hiring at far slower rates than large companies while facing much more uncertainty. Unlike large companies, small firms are less likely to be geographically diversified and don't often benefit directly from improved global trade conditions. They are also more vulnerable to downswings in consumer confidence and have smaller margins for error.

"The small business sector has generally been a key source of employment growth in the U.S. economy, accounting for close to 55 percent of all the private sector jobs created between mid-2003 and the beginning of the last recession," TD Securities' Millan Mulraine told Business Insider. "Its overall contribution has fallen dramatically in recent years, accounting for a miserly 33 percent of the jobs created since the economic rebound."

The U.S. Small Business Administration (SBA) reminds us that not all small businesses are the same. They can generally be divided into four categories: sole proprietorships, the lion's share of small businesses involving services such as builders, consultants and IT specialists; "main street" businesses, such as hair salons, auto mechanics and dry cleaners; high-growth start-ups like tech companies; and commercial and government suppliers.

The SBA notes that the majority of growth seen today - and possibly the most potential for growth - is in the latter two types. Companies that manage to become part of the larger supply chain - often with large companies as clients - can fast-track their growth, and contribute to the health of the nation's multinationals.

"A dynamic U.S. supply chain also can be a determining factor when companies are considering moving production back to the United States and using particular regions of the country as export hubs," SBA Administrator Karen Mills noted in a recent blog series on small business growth.

Startups offer great potential as well: approximately 350,000 startups account for only three percent of U.S. employment, according to Mills, but they are responsible for 20 percent of gross job creation. According to the Bureau of Labor Statistics, just 80,000 high-growth start-ups created 34 percent of all private-sector jobs in a recent three-year period.

Providing the small-business sector with encouragement and resources is a good strategy for boosting job creation, particularly for the industries with the greatest jobs potential. Limited access to credit has been cited as one of the reasons small-business hiring has shown signs of lagging. According to TD Securities, the percentage of businesses willing to increase capital spending has held steady at about 20 percent in recent years, compared to 30 percent prior to the recession. Tight credit is at least partly responsible.

Recent research from the Organisation for Economic Co-operation and Development (OECD) found that smaller companies requesting loans in 2011 faced higher interest rates than in 2009-2010. When they did manage to secure credit, they faced shortened maturities and higher collateral demands.

Some government policies have been attempted to alleviate the situation. The 2010 Small Business Jobs Act boosted the number of SBA loans available to assist small businesses. SBA loans differ from most types of direct loans: they generally aim for lower payments, longer terms, and loosened criteria to allow small companies to borrow more than with a commercial loan.

There are several types of SBA loans, including the flagship 7(a) Loan Guarantee Program, designed to help small companies launch or expand by making capital more readily available through government backing for private loans; the 504 Fixed Asset Financing Program for the purchase or construction of real estate or business equipment; and the MicroLoan Program, which allows the smallest companies to borrow up to $50,000 through non-profit microloan organizations. For manufacturers, tax-exempt industrial revenue bonds are available for companies looking to expand operations or upgrade facilities.

While the White House's 2013 budget supports enhancements to SBA lending programs, political gridlock may hinder any efforts toward expanding these initiatives.

Clearly, small businesses in the U.S. need more support. Despite signs of recovery elsewhere in the economy, the small-business optimism index from the National Federation of Independent Business has lingered at recessionary levels. Part of the problem may be uncertainty about health care obligations that are likely to take effect next year, combined with stagnant consumer confidence. In any case, it seems that until the small business sector restarts, the nation as a whole will remain stalled.