Stimulating small business gets best results

“Small business is a powerful and important driver of economic expansion. The current recession and the corresponding reduction in lending have placed a burden on small business and its ability to grow and to help the economy.”

These words are not mine but the opening paragraph of an overview of new research by FRANdata, an organisation that provides general industry trends and insights on the franchise sector in the US. The study shows that small business, and particularly franchising, is the powerhouse of the economy and has caused a significant policy change in the application of stimulus funds by the US government.

Historically, franchising as a business model has always been extremely resilient to economic slowdowns. In addition, it has helped spur the pace of economic recovery and provided alternatives to individuals who have been down-sized or displaced by other business sectors. The FRANdata study, Small Business Lending Matrix and Analysis, shows the relationship between lending to the franchising industry and the industry’s capacity to develop new business and expand existing business. It demonstrates that for every one million dollars of lending obtained by franchised small business, 34 jobs are created and $3.6 million in annual economic output is realised.

Those are impressive figures, but the study found the current credit crunch is constraining this potential growth and therefore slowing overall economic recovery. As a result, it predicted a 40 percent reduction in franchise lending in 2009. This reduction will result in the loss of nearly 50,000 jobs and over $5 billion in economic activity in the US alone.

The recent legislation passed in the US provides nearly $800 billion for economic stimulus, but less than one tenth of one percent was dedicated towards assisting small business. That was the case until President Obama read the research and asked Congress to pass a law expanding the Small Business Administration guaranteed loans scheme to small business. The result should be that the US economy receives real stimulus at grass roots level.

What is the SBA?

The mission of the US Small Business Administration (SBA) is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters."

The SBA makes loans directly to businesses and acts as a guarantor on bank loans. In some circumstances it also makes loans to victims of natural disasters, works to get government procurement contracts for small businesses, and assists businesses with management, technical and training issues. Directly or indirectly, the SBA has helped nearly 20 million businesses and currently holds a portfolio of roughly 219,000 loans worth more than $45 billion, making it the largest single financial backer of businesses in the United States

Lessons for New Zealand

We may think of the US as the home of big business but according to the SBA, small businesses have accounted for 60 to 80 percent of annual job creation over the past decade, and currently account for almost 50 percent of total jobs in the private sector. If small business is the major provider of jobs in the USA, it must surely be even bigger in the New Zealand economy. Yet, following the original US direction, the New Zealand government has spent big money stimulating the economy without doing much for small business.

With the new research confirming that small business actually has the most influence on the economy, what New Zealand desperately needs is something equivalent to the United States’ SBA. This type of stimulus programme could save some people from going out of business due to funding problems and stimulate others to grow

We are the most franchised country in the world on a per capita basis, so just imagine what an American-type stimulus package could do for the New Zealand economy: soaking up unemployment, providing skills and management training, stimulating growth in various services and primary producers and so on. It would be like franchising: ­a win-win outcome for everyone.

Now that we know where to put government effort, we must waste no time in implementing a stimulus package targeted at assisting this powerhouse of the economy. Having the government guarantee loans that meet the criteria, transacted through the trading banks, would be a far smarter way to stimulate and expand the economy than paying out huge and expanding dole payments. We could even achieve one of our dearest ambitions and catch up with the Aussies!

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