Small Business Investing: Taking Stock in Main Street

Small Business Investing Is Medicine for the Economy

Ask an investor why they choose to fund small businesses and they will probably tell you they enjoy empowering the local economy. Or they need to diversify their portfolio. Or working with independent entrepreneurs is satisfying – and rewarding financially.

Entrepreneurs are our nation’s biggest innovators and top job creators. Consider the following statistics from the Small Business Association (SBA):

• There are 32.5 million small businesses in the U.S.
• Small businesses account for 99.9% of all U.S. businesses.
• Small businesses create 1.5 million jobs annually and account for 64% of new jobs created in the U.S.
• Small businesses increase private-sector employment and generate much of America’s exports.

Small Business Needs Smart Investors

One of the biggest challenges facing small business owners and entrepreneurs has been and continues to be the inability to access sufficient credit and capital. Lending has traditionally been dried up for small employers, resulting in roughly 30% of small businesses and startups running out of cash,

For the first time in June 2020 after a steady downward trend over the past decade, small business lending levels increased to 22.7 percent. However, many small businesses, particularly those in under-resourced communities, did not obtain capital during the pandemic and now are struggling to grow and thrive. Small business investing can change that.

To foster our economic recovery, we need to help the small business community achieve its fullest potential. It’s important for investors to know that entrepreneurship is on the rise, and investments in the small business community can be ripe for opportunity.

Small Business Investing Helps Businesses Lacking Credit

It’s no secret that credit is a long-standing problem for small business owners. Lending to small businesses is considered riskier because they must prove that they can repay their loans. And while the Small Business Administration is offering more loans to entrepreneurs than before the Great Recession, many of those businesses are still having a hard time finding the credit they need.

Small Business Majority’s scientific opinion polling revealed 90% of small business owners believed the availability of credit is a problem, and 61% agreed it’s harder to get a loan than it was in 2008. A 2019 survey also found that most small businesses feel their government officials don’t understand their needs. Small business owners were unhappy with current government resources, which they felt supported larger, established businesses over their own.

In 2022, Truist.com reports that 81% of small businesses are very concerned with filling staff gaps. For 2 years, and still, in 2022, supply chain disruption affected overall performance. Nearly 50% had to adapt how and where they made business purchases. About half of small businesses saw lower profitability and reduced sales along with a third experiencing loss of customers and limits on their operational hours. Nearly 92% invested more money in their business. That necessitates interim funding for many.

Despite a shortage of capital, small business is the engine that drives the economy and job growth in the U.S. A healthy small business community is crucial to our economic growth. In order to boost small businesses’ bottom lines, small business investing ensures that entrepreneurs have the capital they need to grow and hire.

Innovation

As stated, entrepreneurs create more jobs than any other sector of the economy. But what became more evident during the COVID-19 pandemic was the digital transformation. There were new ways to find, sell to, and connect with their customers. Brick-and-mortar storefronts are being replaced by online retailers, and freelancers (or gig workers) are the new version of the 9-to-5 office worker. Many workers are using emerging technologies to leave the traditional workforce, and small businesses and the self-employed are leading this movement.

This new freelance economy is stimulating innovation and entrepreneurship in a way that has never been available before. In fact, independent workers now represent more than one in three working Americans. Freelancers are projected to total 86.5 million or 50.9% of the total U.S. workforce by 2027.

Such entrepreneurs are innovative and savvy, but they face traditional barriers to credit access. That prevents many from taking the freelance economy even further.

Alternative Financing Options

Almost all small business owners have taken pricing action to combat inflation, according to BankofAmerica’s 2022 survey. Entrepreneurs look beyond traditional lending to move forward with a new business idea or to grow despite challenges they face. Crowdfunding is becoming a popular way for entrepreneurs to address credit problems by allowing them to raise capital via the internet. And “fintech” companies like Funding Circle match investors with small business owners looking for capital.

Rapid growth in this space shows there is a community of individual investors actively seeking opportunities to support innovative entrepreneurs. For instance: WeFunder connects startups with investors online and Kiva allows people to lend money via the Internet to low-income entrepreneurs and students in 77 countries. While these new financing options address some barriers to entrepreneurship, there’s still more to be done.

Note: Crowdfunding platforms are typically more useful for small businesses having trouble finding investors or businesses with limited access to investor networks. They are an available option but not always an attractive option for businesses or investors. They may raise less capital than traditional investing routes and increase the number of shareholders. Choose a platform open exclusively to accredited investors and do your due diligence.]

Small businesses and entrepreneurs have long been America’s engine for job growth and innovation. To fully realize the economic potential of America’s primary job creators, we must ensure greater access and more options for obtaining capital. Small business investing is the driver for our nation’s growth, job creation, and competitiveness.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

• Help! My Business Is in Trouble

• Basic Concepts Applicable to All Borrowers and Lenders

• What Every Founder/Entrepreneur Must Know

This is an updated version of an article originally published on November 15, 2019.]

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