Introduction by Dennis P. Lockhart, President and Chief Executive Officer, FRB Atlanta

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• published: 28 Nov 2011
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At the Conference on Small Business and Entrepreneurship during an Economic Recovery, Federal Reserve Board, Washington, D.C. Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta November 10, 2011 DENNIS LOCKHART: When I was told of the idea of this conference, I welcomed the conference on small business and entrepreneurship, because in that title I saw the opportunity for the meeting to address two somewhat distinct, but interrelated or overlapping claims. First, in low- and moderate-income communities, small businesses anchor neighborhoods and generate positive social benefits. And then second, we frequently hear that small businesses account for a great deal of private sector employment and new jobs. Now, I've been thinking quite a lot recently about the jobs crisis in the country, and the jobs crisis that the country is experiencing, and the role of small business in a solution. In my time this morning I'd like to look at the connection between small businesses and job creation, that is the second of the two claims. In that regard, we also hear often that the small business sector doesn't have enough access to capital, and if only the banks would lend more money, jobs would be created. I'd like to look more deeply into this assertion and try to understand the underlying commercial reality. So my topic this morning is small business, job creation, and bank financing. As Todd mentioned I'm a former banker. So I think I might add some value to the conference by going into some depth on the subject of how banks actually lend to small businesses with a particular focus on start-ups. It's axiomatic that almost all start-ups are small businesses. It turns out that research shows, as regards to job creation, it's new businesses that make the most difference in creating jobs rather than small businesses broadly defined. The Kauffman Foundation supported this -- supported research -- that came to this conclusion, and I believe this point was made by Carl Schramm yesterday in his passionate call for more start-ups. So, to narrow the focus of my remarks this morning even further, my topic is start-ups, job creation, and bank financing. Now, let me put start-ups, or new business formation, in the full context of the small business sector. The small business sector, and this point was made by my colleague John Robertson, is extremely heterogeneous. Among the conventional criteria for classifying a business as small are: number of employees, revenues, assets, number of establishments, and sometimes legal structure. Unfortunately, no single metric provides a definition that is adequate for all purposes. I'm told that a report to Congress in the 1970s cited over 700 different possible definitions of small business. The most commonly applied metric as you heard yesterday is number of employees, with cuts at 500 or fewer, and 50 or fewer. I know many of you are quite familiar with the following picture, but let me quickly review some high-level information. On an employment basis, the vast majority of business enterprises in the United States are small, even, far smaller than 50. According to the 2008 statistics of U.S. businesses, there are about 21 million non-employer businesses in the country. Most are self-employed individuals operating very small, unincorporated businesses which may or may not be the owner's principle source of income. These are important sources of employment for the owners, but clearly are not strong creators of jobs for others. Of the slightly less than 6 million businesses that have paid employees, almost 80% have fewer than 10 employees. So, back to categorization -- for the purpose of talking about start-ups and their impact on job creation, let me suggest a more qualitative categorization. I think we can put new businesses into two buckets: Scalable, growth businesses versus inherently small-scale firms. The former, that is scalable growth businesses have been referred to in a Kaufman Foundation study as "gazelles," and again you heard that term yesterday. The latter, the inherently small scale businesses, are sometimes called "mom-and-pops." Inherently small-scale firms often populate highly-fragmented industries like restaurants, dry cleaners, boutique retail stores, and beauty salons. Occasionally one of these inherently small-scale businesses surprises even the owner by growing beyond expectations; and, occasionally the business concept is unique enough to be franchised and thereby grow to substantial scale. Every once in a while a burger joint in San Bernardino, California becomes McDonald's, but mostly the business people who launch these small-scale enterprises start with the intention of remaining relatively small.