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A new way to look at small businesses

April 3, 2014 / Sadaf Knight / Economy, Small Business

The term “small business” can mean a lot of things, and how the term impacts how businesses are supported through a variety of government and non-government programs and services. Policies and programs are set up to address the needs and challenges of different sized businesses, based on their number of employees. A report by the Federal Reserve Bank of San Francisco provides a new lens for how we think about these companies– revenue size instead of employee size. With so many stakeholders invested in small businesses, it is important to bridge the communication gaps.

The two recommendations of the report are:

  1. The most useful way to talk about small business is by revenue categories, not by number of employees.
  2. All businesses need structured support systems, not just capital.

Pretty much everyone describes small businesses by the number of employees. The authors argue that instead, we should be looking at revenue size as this would allow us to identify businesses with similar needs. Based on experience working with Pacific Community Ventures, a CDFI based in San Francisco, CA, the authors argue that there are key points at which business growth stalls, and this is tied to revenue growth, not employee growth.

This is a valid point to consider. Different types of businesses have different labor requirements, depending on the industry, location, and cost of labor. The report gives the example of a pharmacy that can grow quickly with just a few employees, compared to a manufacturing firm that can take longer to grow even with many employees. “Growth” and “size” in these cases would more appropriately be described by their revenue rather than number of workers. The report provides a table of the critical issues faced by businesses of different revenue sizes. Using this as a foundation, the range of small business support programs could then dig deeper to further customize assistance for the businesses they serve.

From: http://goo.gl/5DObfK

In addition to capital, the authors also correctly point out that businesses need a broader array of support in order to be successful– particularly those in underserved communities. After getting a loan, businesses need technical assistance, business skills development, and advisory services in order to take growth to the next step. Service providers need to understand what the right mix of services is and different points along a business’s growth trajectory.

Having a unified and appropriate definition of small businesses would help lenders, government agencies, banks, and service providers know how to best serve these companies.