There's been some debate among economists and small business supporters recently over how exactly "small business" should be defined. At the heart of the issue is the government's definition of small business, which it says are companies of less than 500 employees. It's my contention as well as others that a 499-employee business isn't exactly "small."
Those who agree think we need to reclassify small businesses into different categories so when the government (and media) is talking about how to "help small businesses," the government can know exactly who it's talking about. The needs of a truly small business with three employees run on credit cards and home equity loans are far different than a venture-capital backed "small business" with 100-plus employees. By reclassifying small business, the government can more effectively develop legislation and policy to affect those that really need it.
This issue is even more important in light of a recent BillShrink.com report that found credit card rates for small-business accounts have increased 13.7% over the past six months, which costs small businesses $420 million in incremental finance charges. By comparison, consumer rates have only increased 2.4% on average. A six-times increase in rates has spurred calls for congress to get involved to help small businesses (there's that term again) that are being hurt by this credit rate crunch.
Congresswoman Jackie Speier, a Democrat from California, told USA Today last week that she's pushing for passage of a bill that would extend consumer protections to those small businesses with less than 50 employees. Here, Speier is talking about the sweet spot of small business: the ones hurt the most by increased costs incurred by such hefty credit rate hikes.
Not only are interest rates higher, but banks slashed lending to small businesses by 9% between 2008 and 2009, according to a recent Congressional Oversight Panel report. This is further hampering companies from acquiring the funds they need to grow and be successful.
Recessions tend to give birth to new ideas and businesses as individuals jettisoned from larger corporations strike out on their own. Our economy is built on this entrepreneurial spirit and will only expand if small businesses are able to succeed. The nation's economic policies must be written and enacted to ensure that these true small businesses have access to the credit they need to get off the ground and grow.
To write such policies, we need to first make sure we have the proper classifications of small business as the current definition is far too broad. Rep. Speier is on the track with her "50 employees or less" thinking. Hopefully all governmental policy makers follow suit.