The Feeble Role of Government to Stimulate Small Business

The news is filled with quotes from government officials exposing the critical role small business play in our economy. Articles talk about the billions in government dollars directed toward supporting small businesses. However, before you stake your claim on these funds, you should understand the assumptions the government has about small business.

Having made several trips to Washington D.C. to advocate for small businesses, I have asked many government officials to define the term “small business.” The image most government officials have when they speak of small business is that of a successful business that has:

  • Been around for ten years or more
  • Employs several dozen to several hundred employees
  • Has continued to maintain a good credit history despite changes in the economic conditions.

As you can see, this definition contrasts strongly with what everyday people, and small business owners themselves, think of when they define a small business. We more often define a small business as employing only one or two employees, generally all having an ownership stake in the business, and frequently struggling to achieve or maintain profitability. Government officials tend to define these businesses as a non-employer or micro business.

Currently, the government’s small business stimulation initiatives generally fall into one of two broad categories: loan guarantees and funding infrastructure projects.

Loan Guarantees:

A large portion of government small business dollars are earmarked toward lending provided through the Small Business Administration (SBA), which is not a direct lender to businesses. Banks are the actual entities that often loans money to businesses.

The SBA helps banks feel more comfortable loaning money to small businesses by offering the bank a loan guarantee if the loan goes bad in the form of an insurance policy that the borrower pays. Since banks are the direct lenders to small business, the bank is the one that has to feel comfortable with the business’s ability to repay the loan. With all its influence, the government is not in a place to force banks to make loans they do not feel are prudent.

Infrastructure:

In addition to money directed toward small business lending, the government directly stimulates a special class of small business by creating government-funded projects. Most visible amongst these types of projects are infrastructure projects such as highway projects. As you might image, competition for these jobs is fierce and most are awarded to prime contractors that are larger, well-established companies.

Infrastructure Set Asides:

For a smaller business to get a piece of the government’s infrastructure dollars, the small business generally needs to be owned and controlled by one of the many minority classifications defined by various government entities. Most government contracts have some portion of the overall budget that is awarded to a prime contractor that must be spent contracting for products or services provided by a small business with a recognized small business certification.

All government contracting agencies recognize the small business certification called a Disadvantages Business Entity (DBE). To qualify as a DBE, the principle business owner needs to own 51% or more of the business and to be both economically disadvantaged as well as socially disadvantaged.

The criteria for the principle owner to be considered economically disadvantaged are:

  • Less than $1.32M net worth – excluding home and ownership interest in a firm
  • Less than $350K in adjusted gross income
  • Less than $6M to total fair market value of all owned assets
  • No excessive assets like a yacht or luxury vacation home

To be considered socially disadvantaged, the principle owner needs to consider themselves as a member of one of the following social groups that have a history of some level of discrimination:

  • Black Americans
  • Hispanic Americans
  • Native Americans
  • Asian-Pacific Americans
  • Subcontinent Asian Americans (India, Pakistan…)
  • Women
  • Handicapped (if discriminated against, e.g., birth defects, etc.)
  • LGBT

In addition to being a minority business, a Service-Disabled Veteran-Owned Small Business (SDVOSB) is another small business certification that is recognized by federal and most state agencies.

So while the government may understand the importance of small business in the overall economy, its definition often differs from the way most entrepreneurs may define small business. As a result, the methods in which the government can inject money are primarily limited to guaranteeing loans and creating projects for a narrow slice of the business community.

Can you stake your claim on government small business funds?


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