Small Business, Job Creation, And Why We Should Lend To Young Companies

Any honest conversation about creating jobs in the United States must include the role played by small business. Collectively, these businesses create the lion’s share of new jobs. The current SBA Administrator Maria Contreras Sweet regularly argues that two out of every three new jobs are created there. So when Experian approached me with a new study that explored the impact of small businesses (particularly startups), on our economy and what we could do to encourage more job creation, they had my attention.

As one of the three biggest business and personal credit reporting bureaus, I consider Experian’s advice and perspective very relevant to this conversation. I recently spoke with Peter Bolin, Experian Director of Consulting and Analytics, to talk about the research. When they dived into the data they found that small businesses and startups really do have a direct impact on job creation in the United States. They focused on the 2010 class of startups and looked at the resilience of the overall US economic recovery and how these businesses have performed in the four years since they opened their doors.

It’s probably no surprise that as the economy improved, so did these young businesses. What might be a surprise is Bolin’s assertion that these 2010 startup businesses are driving the recovery. As unemployment has come down, it looks like small business has had a big role to play in the decline.

These companies are the type of small businesses you might find on any Main Street or in any town all across the country. The 2010 average number of employees in Experian’s group of startups was four. Today, however, the average for these same companies is five and a half—that’s a growth in employment of over 30 percent (which we would consider incredible if the businesses were bigger). Individually, the addition of an employee and a half might not sound like much, but small business’ impact in communities, and the economy generally, has always been cumulative.
Creating New Jobs Requires Capital

One of the biggest challenges these young companies face is capitalizing growth. Unfortunately, traditional lenders shy away from young companies because they perceive them as risky, although Bolin argues that many of them are highly “lendable.”

“While their credit scores will naturally be lower because their credit history is short, there are often other factors that make these business owners potentially good borrowers,” said Bolin. “We are telling our lender customers to avoid automatically dismissing this group as high risk.”

While their initial business credit scores were low, as a group the average has improved substantially over the four years from 2010 to now. “New business might equal lower scores, but the average small business owner is creating 1-1/2 trade credit relationships each year and using smaller loans to build their credit profiles over the first few years,” he said. “Ultimately indicating to us that many of these business are great potential borrowers.”

[“source – forbes.com”]