Outsourcing is a mixed blessing. Big companies don't pay top dollar: After all, their goal is to cut costs. And they can yank business without warning. But there's still money to be made by performing functions more efficiently than large companies can. Small-biz guru David Birch says his own small outfit, Cognetics Inc. of Waltham, Mass., took over the marketing function for several large companies, setting up telemarketing programs and checking out possible customers. "It probably adds a little bit to volatility, but on balance, it's been good," says Birch, whose company has since been bought by French advertising giant Publicis (PUB ) and renamed Arc Analytics.
Two parts of the Bush tax-cut program are especially advantageous to small business. Most small companies are sole proprietorships or Subchapter S corporations, so they pay taxes at individual income tax rates, which have been slashed. Also, businesses are allowed to deduct from taxable income up to $100,000 of new equipment, up from $25,000. That's trivial to giants but a major incentive for small fry.
At the same time, loans are cheap and relatively easy to get. Greenwich Associates, a consulting firm for financial institutions in Greenwich, Conn., says that in a July survey, 27 percent of small businesses cited easier credit conditions, while 19 percent reported tighter credit conditions. A year earlier, the responses to the same question were almost exactly the opposite. Banks are getting credit to small businesses more rapidly by using online data about them, combined with credit-scoring software similar to what's used for approving home-mortgage loans. Wells Fargo (WFC ) & Co., for instance, offers unsecured lines of credit of up to $100,000, without requiring financial reports or tax returns. The business owner personally guarantees the loan.
Of course, small businesses can't thrive with the rest of the economy in the tank. That's why their owners take heart from the long-awaited growth pickup. Gross domestic product grew at a 3.3 percent annual rate in the second quarter and is expected to expand at a rate of 4 percent to 5 percent in the second half. And while consumer spending has sustained the economy until now, business investment is finally accelerating. That's good for small businesses that mainly sell to other businesses.
Business is far from booming, but at least there are signs of progress. "Everyone was in a maintenance mode for the longest time," says Keith M. Parent, CEO of Court Square Data Group Inc., a Springfield (Mass.) information-technology consultancy. "I'm starting to see people loosen up on the purse strings." David W. Bland, president of Trivis Inc., a Birmingham (Ala.) company that advises nuclear-plant operators on how to deal with their spent fuel rods, also sees a pickup in spending. "People are still cautious, but they can't wait forever," he says. "We've had 60 to 90 days of pretty good orders. I believe the economy has turned."
SNAP, CRACKLE, POP
Even in manufacturing, some small companies are managing to grow. Wolverine Proctor & Schwartz Inc., the leading maker of ovens for dry cereal, was founded in 1930 and developed the process that puts the snap, crackle, and pop in Rice Krispies. But it was so heavily in debt by 2001 that it couldn't post standby letters of credit against customers' deposits on the ovens they were buying. That year, Parthenon Capital LLC, a Boston investment firm, took it over and paid off its obligations. Since then, revenue has risen 20 percent and earnings have doubled.
In some ways, the resilience of small business during this recovery fits in with the trends of the past two decades. In the early 1980s, the output of companies with fewer than 500 employees was 4 percent less than the output of businesses larger than that, according to an analysis of Commerce Dept. and Internal Revenue Service data by Joel Popkin & Co., a Washington-based economic consulting firm. Since then, though, small business has rebounded and produces about 15 percent more than the big guys, according to the Popkin report, which was published in July by the Small Business Administration.
Advocates for small business, including the SBA, like to argue that the sector accounts for the vast majority of U.S. job growth. That's usually an overstatement -- there are times when big businesses account for the lion's share of job growth. However, what small businesses do provide is a relatively stable employment base. They hold on to workers in hard times because they know they'll be hard to replace when good times return. What's more, small businesses are flexible and innovative. Small companies often initiate products and services that are later perfected by big companies, from the helicopter and air conditioning to the personal computer and the heart valve. "There's this romantic notion that we need lots of small business to generate jobs. What we need is a mix of small and large businesses," says Robert E. Litan, a senior fellow at the Brookings Institution and vice-president for research at Ewing Marion Kauffman Foundation in Kansas City, Mo., which promotes entrepreneurship and education.
Small businesses can't make it all by themselves. But they kept their heads above water during the hard times. And now they're doing more than their share to get the U.S. economy growing again.
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