U.S. Small Business Administration claims that its lending programs provide much-needed funding to small businesses that allow them to grow and create jobs. But are the businesses receiving SBA loans actually increasing employee counts?
In 2012, the SBA backed $30 billion in small business loans, and “the overwhelming majority of those loans went to existing businesses rather than startups,” according to a recent piece by National Public Radio.
The problem is that most small businesses stay small and that it is those few, fortunate startup companies that actually become super jobs creators, according to economists who spoke with Tamara Keith of NPR’s “Morning Edition.” "Their loan programs, I would say, would be better targeted towards young businesses than small businesses per se," John Haltiwanger, an economics professor at the University of Maryland, said of the SBA.
The East Coast organic salad chain Sweetgreen, for example, grew rapidly, but Sweetgreen only won approval for an SBA-backed loan after it was already established, according to the NPR story.
A study by the Kauffman Foundation, an entrepreneurship research organization, supports this notion that job creation comes from startups—not established businesses. It found that between 1997 and 2005, existing businesses lost 1 million jobs, while firms in their first year added 3 million jobs. “On average, one-year-old firms create nearly 1 million jobs, while 10-year-old firms generate 300,000,” a news release about the study notes. “The notion that firms bulk up as they age is, in the aggregate, not supported by data.”
The problem with providing loans to startups, of course, is the high failure rate, meaning SBA loans to those businesses would be very risky. Studies have found that 55 percent of startups fail by their fifth year.
SBA data, however, shows a different view of job creation. It finds that its established businesses that add—and keep—jobs. According to an SBA fact sheet on job creation: “About 60 percent of the private-sector net new jobs are from existing establishments and about 40 percent from the churn of startups minus closures in the last two decades.”
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