Small Business Facts from the 1990s

8/96

Interest in owning or starting a small business has never been
greater than it is today. New business formation in the United
States has broken successive records for the last three years.
During 1995 there were 819,000 new firms – a 1.5 percent increase
over the record 807,000 in 1994.

Since 1982 the number of small businesses in the United States has
increased 49 percent. As of 1994 there were approximately 22.1
million nonfarm businesses, of which 99 percent were small by size
standards set by the U.S. Small Business Administration. These
included corporations, partnerships and sole proprietorships.

Part-time entrepreneurs have increased five-fold in recent years.
Almost two-thirds of the 22.1 million nonfarm businesses operate
full time; the remaining one-third operate part time.

Under a broad definition that includes people running a business
either full time or part time, about 16 million American sole
proprietors are engaged in some entrepreneurial activity. These
entrepreneurs represent about 13 percent of all nonagricultural
workers in the United States. Recent research demonstrates that
about three-quarters of new business owners are employed with a
wage-and-salary job when they start a new business.

The small business environment is dynamic and energetic. The fol-
lowing information illustrates just how valuable small business
is to the U.S. economy.

Small businesses –

* employ 53 percent of the private work force,
* contribute 47 percent of all sales in the country,
* are responsible for 50 percent of the private gross domestic
product, and
* produced an estimated 75 percent of the 2.5 million new jobs
created during 1995.

There is more good news. Both business failures and bankruptcies
declined between 1994 and 1995. Failures declined 0.5 percent, from
71,558 to 71,194; bankruptcies also declined 0.5 percent, from
50,845 to 50,516.

Women- and Minority-Owned Firms

According to a 1995 study by the National Foundation for Women
Business Owners and Dun & Bradstreet, there are now 7.7 million
women-owned firms providing jobs for 15.5 million people – more
than are employed in the Fortune 500.

Data on women- and African-American-owned businesses for 1987 and
1992 – the latest data available from the Department of Commerce –
reveal that these businesses fared well in the strong economy of
the late 1980s. Between 1987 and 1992, the number of women-owned
small proprietorships/partnerships rose from 4,112,787 to 5,888,883,
an increase of about 43 percent. The total receipts of women-owned
small proprietorships/partnerships nearly tripled over this same
period, rising from $278.1 billion in 1987 to $642.5 billion in 1992.

The Bureau of Census reported 517,000 women-owned corporations in
1992. With the inclusion of women-owned large corporations, there
were over 6.4 million women-owned firms with receipts of nearly $1.6
trillion in 1992. These businesses represented 37 percent of all
firms for that year.

Between 1987 and 1992, the number of African-American-owned
businesses rose by 46 percent, from 424,165 to 620,912. As of 1992
the receipts of African-American-owned businesses totaled $32.2
billion, up from the $19.8 billion in receipts in 1987.

Hispanic-owned businesses proved to be one of the fastest-growing
segments of the U.S. business population during the 1980s. Between
1982 and 1987, the latest years available, the number of Hispanic-
owned businesses rose from 233,975 to 422,373, an increase of 80.5
percent; their total receipts rose from $11.8 billion in 1982 to
$24.7 billion in 1987.

Businesses owned by Asian Americans, Native Americans and other
minorities increased by 87.2 percent between 1982 and 1987. This was
the fastest increase of all the minority business groups surveyed by
the Bureau of Census for those years.

With the exception of nonminority male-owned firms, businesses owned
by Asian Americans, Native Americans and other minorities had the
highest average receipts in 1987 of $90,350 per firm. By contrast, all
firms in the economy within the scope of census surveys had average
receipts of $145,654 in 1987, while African-American and Hispanic firms
averaged $46,593 and $58,554 in receipts, respectively. The 1992 census
data on all minority-owned firms should be available before the end of
1996.

Federal Procurement

During fiscal year 1995, the federal government spent $202.3 billion
for the acquisition of supplies and equipment, construction services,
research and development, and a variety of other services. Awards to
small firms accounted for $42.9 billion. Of this amount, over $31.8
billion was for contract actions exceeding $25,000, and $11.1 billion
was for contract actions under $25,000.

Approximately 64 percent of all federal procurement from firms owned
by socially and economically disadvantaged individuals is achieved
through the 8(a) Program – a federal government set-aside program.
According to Federal Procurement Data Center figures, approximately
$6.2 billion was awarded to such firms through this program in FY 1995.
This amount represented approximately 5.2 percent of all federal
procurement in FY 1995; women-owned firms received 1.8 percent.

Owners’ Income

The income of nonfarm proprietors and partners rose to $449.2 billion
during 1995. This was up from $415.9 billion during 1994, representing
an increase of 8 percent. By contrast, the compensation of employees
rose 5 percent during 1995. While the income of nonfarm proprietors
represents only about 10 percent of total employee compensation (wages
and salaries), about 85 percent of small firms are organized as pro-
prietorships or partnerships. Therefore, 1995 was an especially good
year for the income growth of a majority of small business owners.

Employment

Small firms have traditionally added more than their proportional share
of new jobs to the economy. Within each business cycle, the small busi-
ness share of net new jobs increases most rapidly during the recovery
stage and the earlier parts of the expansion stage. As the economy
approaches full employment during the latter part of the expansion stage,
larger firms tend to produce a larger share of new jobs.

Between December 1994 and December 1995, employment in small business-
dominated industries increased 2.7 percent, generating 1.25 million new
jobs, or 75 percent of the total. From 1990 to 1994, based on Dun & Brad-
street data by firm size, virtually all net new jobs were generated by
small firms with fewer than 500 employees; large companies continued to
downsize, with separations exceeding hires. Microbusinesses, those
businesses with one to four employees, generated about 43 percent of the
net new jobs, while firms with five to 19 employees created another 37
percent of new employment opportunities. During the same period, there
were about 4.2 million net new jobs added to the economy. Since 1993 more
than 8 million new jobs have been created across the entire economy.

From 1976 to 1990, small firms with fewer than 500 employees provided 53
percent of total employment and 65 percent of net new jobs. The latest
census data available that were produced under contract for the SBA
indicate that from 1990 to 1992, microbusinesses created all of the net
new jobs. Of the gross jobs created, 742,000 came from the expansion of
new microbusinesses into firms with five to 19 employees. The remaining
jobs came from small-firm start-ups.

The fastest-growing sectors of small business-dominated industries during
the past several years include restaurants, outpatient-care facilities,
physicians’ offices, special trade contractors, computer- and data-
processing services, credit-reporting and collection firms, medical and
dental laboratories, day-care providers, and counseling and rehabilitation
services.

High-Technology Employment

In 1991 small firms (under 500 employees) provided 25 percent of the
jobs in high-technology industries. These 53,550 high-tech companies
had receipts of $140.9 billion, or 19 percent of the industry total.
Ninety-three percent of high-tech firms have fewer than 500 employees;
70 percent have fewer than 20 employees.

Workplace Trends

Jobs generated by small firms are more likely to be filled by young
workers, senior workers and women. Many of these workers prefer or
are only able to work on a part-time basis, and can be more easily
accommodated by small, rather than large, firms.

Collectively, small businesses provide about 67 percent of all initial
job opportunities and are responsible for most of the initial on-the-
job training in basic skills.

According to recent projections of the Bureau of Labor Statistics, small
business-dominated sectors will contribute about 60 percent of new jobs
from 1994 to 2005. About 88 percent of these jobs will be in retail
trade or services. Some of the fastest-growing small business-dominated
sectors during this period will be medical and dental laboratories (up
84 percent); residential-care industries related to housing of the
elderly and group homes, and social services such as drug rehabilitation
(up 83 percent); credit reporting (up 68 percent); equipment leasing (up
51 percent); child day-care services (up 59 percent); and job training
(up 43 percent). Jobs in some of the highest-paying service sectors,
such as physicians’ offices, and architectural and engineering services,
will rise about 30 percent. In addition, the restaurant industry – always
a prolific small business job creator – is projected to add 1.02 million
new jobs between 1994 and 2005.

Sources of Financing

Major categories of financing available to small businesses include
internal sources, such as owners’ savings, business retained earnings
and depreciation; informal external sources, such as friends and business
associates; financial intermediaries, such as banks and finance
companies; and public markets, where standardized financial instruments
are sold.

More than two-thirds of all new firms begin with less than $10,000 in
total capital according to Census Bureau and Federal Reserve surveys.
In fact, almost half of new firms begin with less than $5,000, usually
provided by the owner, family members and friends.

Overall, small firms rely more on equity capital and short-term debt,
and less on external-debt capital and long-term debt, than larger firms.
Most small firms use external financing only occasionally. Under 50 per-
cent of small firms borrow once or more during a year.

However, small firms experiencing rapid growth or those with high volumes
of receivables require frequent use of external financing.

A 1994 national survey of small firm financing (co-funded by the SBA
and the Federal Reserve) for firms with one to 499 employees revealed
the following financing patterns:

* Of all small firms, 26 percent had lines of credit, 9 percent had
financial leases, 6 percent had mortgage loans, 14 percent had
equipment loans, and 24 percent had motor-vehicle loans in 1993.

* Of larger firms with 100 to 499 employees, 60 percent had lines of
credit, 30 percent had financial leases, 19 percent had mortgage
loans, 29 percent had equipment loans, and 26 percent had motor-
vehicle loans in 1993.

Banks are the dominant suppliers of these types of financing; 37 per-
cent of small firms obtained some financing from commercial banks.
Other major suppliers include finance companies, leasing companies and
other nonfinancial institutions.

The cost of borrowed funds is higher for small firms – interest rates
on bank loans average two or three percentage points over the prime
rate, and fixed-rate loans are usually more expensive than floating-
rate loans.

For the smallest firms, those mom-and-pop operations with or without
hired employees, owner capital is the most important source of
financing. Other sources of financing include trade credit, personal
loans from financial institutions, and loans from friends and relatives.

Innovation

Among the important innovations by U.S. small firms in the 20th century
are the airplane, audio tape recorder, double-knit fabric, fiber-optic
examining equipment, heart valve, optical scanner, pacemaker, personal
computer, soft contact lenses and the zipper.

Studies have provided the following information about innovation:

* Small firms produce more than twice the number of innovations per
employee as large firms.
* Small firms obtain more patents per sales dollar, even though large
firms are more likely to patent a discovery.
* In small research-and-development firms, 6.4 percent of employees are
R&D scientists and engineers; scientists and engineers make up over 4
percent of the employee population in large R&D firms.
* Large firms receive 26 percent of their research-and-development dol-
lars from the federal government. They are more dependent on federal
R&D dollars than small firms, which receive only 11 percent of their
R&D funds from the federal government.
* A federal R&D dollar provided to a small firm is more than four times
as likely to be used for basic research as a federal R&D dollar given
to a large firm.
* The rate of return on total R&D expenditures is 26 percent for both
small and large firms, but only 14 percent for firms not involved
with a university. The estimated rates of return on total R&D for
firms with a university relationship are 30 percent for large firms
and 44 percent for small firms.
* The average small enterprise with intellectual property has 61
employees, with 19 percent of the employees in R&D; the average large
enterprise with intellectual property has 12,879 employees, with 3
percent of the employees in R&D.

Innovations coming from small high-tech firms are expected to increase
in the coming years as a result of funding increases in the Small
Business Innovation Research Program. Under this program, federal
agencies with large R&D budgets must direct designated amounts of their
R&D contracts to small firms.

Since the inception of the SBIR Program in FY 1983, almost $4 billion
in competitive federal R&D awards has been awarded to qualified small
businesses. In 1992 Congress reauthorized the program to continue
through September 30, 2000.

Source: SBA Office of Advocacy

For More Information

Information is power. Make it your business to know what is
available, where to get it and, most importantly, how to use it.
Sources of information include:

U.S. Small Business Administration

* SBA District Offices
* Small Business Development Centers (SBDCs)
* Service Corps of Retired Executives (SCORE)
* SBA OnLine (electronic bulletin board)
* Business Information Centers (BICs)

The SBA has offices located throughout the United States. For the
one nearest you, look under “U.S. Government” in your telephone
directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To
send a fax to the SBA, dial (202) 205-7064. For the hearing
impaired, the TDD number is (704) 344-6640.

To access the agency’s electronic public information services,
you may call the following:

SBA OnLine: electronic bulletin board – modem and computer
required
(800) 697-4636 (limited access)
(900) 463-4636 (full access)
(202) 401-9600 (D.C. metro area)
Internet: using uniform resource locators (URLs)
SBA Home Page: http://www.sba.gov
SBA gopher: gopher://gopher.sba.gov
File transfer protocol: ftp://ftp.sba.gov
Telnet: telnet://sbaonline.sba.gov
U.S. Business Advisor: http://www.business.gov

You also may request a free copy of The Resource Directory for
Small Business Management, a listing of for-sale publications and
videotapes, from your local SBA office or the SBA Answer Desk.

Other Sources

* State economic development agencies
* Chambers of commerce
* Local colleges and universities
* Libraries
* Manufacturers and suppliers of small business products and
services
* Small business or industry trade associations

All of the SBA’s programs and services are provided to the public on a
nondiscriminatory basis.

FS0040 (8/96)

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