What is a “small” business and what sectors have the most of them?

This year’s Small Business Week is at a time when many small businesses are facing uncertainty and unprecedented financial difficulties due to coronavirus and shelter-in-place orders. But what is a small business, exactly, and how important are they to the US economy?

What is a “small” business? It depends.

Businesses with fewer than 500 employees are generally thought of as small businesses—the CARES Act frequently cites this number when describing the Paycheck Protection Program. In reality, the Small Business Administration (SBA) uses a complex set of size standards to determine small business eligibility. These size standards consider a variety of industry characteristics like degree of competition, average firm size, technological changes, and growth trends.

Some industries, such as manufacturing, have size standards based on the number of employees. Other industries—including most agriculture, construction and retail trade sectors—have size standards based on average annual revenue. Standards vary greatly by the industry sub-sector. For example, businesses in support activities for oil and gas operations with average annual revenue below $41.5 million are considered “small”, whereas in many agricultural fields, average annual revenue must be below $1 million for a business to be considered small. Similarly, businesses in a number of manufacturing and mining sub-sectors can have up to 1,500 employees and still be considered small, yet some wholesalers must have fewer than 100 employees to be considered small.

How many small businesses are there and which industries are they mostly in?

Despite these nuances about small business size standards, government agencies including the SBA often use the number of small businesses with fewer than 500 employees as a proxy for the true number of small businesses. According to the SBA, using the definition of small businesses as having fewer than 500 employees, there are 30.7 million small businesses in the country. Many, many companies fall under the 500 employee threshold, meaning the US has a lot small businesses. So many that they make up 99.9% of businesses in the nation. That means that roughly 0.1% of businesses, like Walmart and McDonald's, employ 52.7% of the private workforce.

Employment

Using the fewer-than-500-employees rule, the healthcare and social assistance sector has the most employees working at small businesses. Nine million people are employed at small businesses, accounting for 44% of the healthcare and social assistance sector’s employment. Food services and drinking places employ 7.7 million people in small businesses, accounting for 64% of the sector’s employment. Other sectors with a high concentration of small business employment include the construction sector, where 82% of employees work in small businesses, and agriculture, forestry, fishing, and hunting, where 83% of employees work in small businesses.

Small Business Employment and Payment Protection Program (PPP) Loans

(PPP loan amounts are for the $350 billion round of loans through 4/16/2020)

Revenue

Small businesses also make up a significant portion of business revenue each year. In 2017, businesses with under 500 employees took in $13.3 trillion, accounting for 36% of total business revenue that year. In most cases, the proportion of revenue in a sector accounted for by small businesses is fairly similar to the proportion of employment in that sector accounted for by small businesses. However, in the management of companies and enterprises sector (including businesses like holding companies), small businesses make up only 12% of employment but 46% of all revenue. On the other hand, small businesses in the manufacturing and wholesale trade sectors make up 43% and 56% of employment, respectively, but only make up 24% and 34% of revenue, respectively.

Who works at small businesses?

According to the SBA, using the fewer than 500 employees definition, 59.9 million Americans work at small businesses, accounting for 47.3% of the private workforce. In some states, the small business workforce comprises a greater proportion of the workforce than others. For example, employees at businesses with fewer than 500 employees make up over 60% of the Vermont, Wyoming, and Montana workforces, and under 43% of the workforces in Nevada, Tennessee, and Florida.

Small Business Employment as a Proportion of Overall Employment

How does the government support small businesses? Where are Payment Protection Program dollars going?

Being a small business comes with some advantages—namely, support from the SBA. The agency provides small businesses with increased access to capital through lending, training programs, and guidance to win the 23% of government contract dollars that are reserved for eligible small businesses.

The SBA is best known for its lending programs, through which it approved 100,000 loans for a total $30.2 billion in 2019. The majority of the SBA’s lending is typically through 7(a) loan guarantees, a general set of loans that include the standard 7(a) loan with a maximum of $5 million. It has a turnaround time of 5-10 business days and an express loan with a maximum amount of $350,000 made within 36 hours.

However, as USAFacts analyzed in a recent piece, recent legislation by Congress establishing and expanding the Paycheck Protection Program (PPP) exponentially increased the SBA’s lending. Intended for businesses to cover payroll costs without paying a large portion back to the government, the initial PPP loans allocated by the CARES Act were worth $342 billion. SBA leadership says the agency processed more than 14 years' worth of loans in less than 14 days.

While not all small businesses are necessarily under 500 employees, the count of businesses with fewer than 500 employees is a useful proxy for small businesses.

Paycheck Protection Program loans per small business (<500 employees)

Some states received a higher number of CARES Act PPP loans per small business than others. For example, while North Dakota received 582 PPP loans per 1,000 small businesses, California only received 149 PPP loans per 1,000 small businesses.

When looking at PPP loans by industry, industries with higher levels of small business employment generally received more money. However, this was not always true. For example, the accommodation and food services industry has the second largest number of employees working in small businesses with 8.5 million employees; however, the sector received nearly $15 billion less in PPP loans than the construction sector did, with 5.4 million employees. For more data on the distribution of PPP loans by sector, explore the bubble chart above or the table below.

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