Small Businesses: Too Big To Fail

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Companies that are “too big to fail” have been getting most attention in the bailout packages emerging from the federal government. But in the economic recovery plan now being considered by Congress and the incoming Obama Administration, the focus should be on small businesses.

While the Big Three have been the latest squeaky wheels to get greased by billions of dollars in taxpayer bailout money, small businesses are the real engine of job creation and innovation in the U.S. economy. With a little bit of help, they will be the locomotive that pulls us into the new energy economy of the 21st century.

The US Small Business Administration (SBA) defines small companies as those with fewer than 500 employees. If there are any doubts about their influence on the economy, consider these statistics from the SBA and the U.S. Census:

  • Small companies comprise 99.7 percent of all firms with employees in the United States. As of 2004, nearly 7 million small businesses were operating in our economy, employing nearly 60 million workers.
  • Small businesses provide half of the jobs in the United States and pay 45 percent of the nation’s private wages. Their total payroll approached $2 trillion in 2004.
  • Over the past decade, small companies have created as much as 80 percent of net new jobs in the U.S. economy each year.
  • They hire 40 percent of our high-tech workers and produce 13 times more patents per employee than large firms.

The tight credit market, toxic mortgages and lower sales are hurting these companies, as we might expect. Of special concern to the goal of building a new energy economy in the U.S. are business engaged in green industries, including renewable energy, energy efficiency and sustainable buildings. They have been fast-growing sectors of the domestic and global economies in recent years.  Just a few months ago, renewable energy industries were considered recession-proof.

But as 2008 came to a close, alternative energy stocks were among those being battered by the economic crisis. In a year-end assessment, the Associated Press reports that stocks are taking a beating and credit markets have tightened for biofuels, wind and solar power, despite the federal biofuels standard and the extension of $17 billion in federal tax credits for solar and wind development.

The green building sector – ranging from real-estate developers to landlords hoping to improve the energy efficiency of their buildings – is handicapped by tight credit and deferred investments.

The AP quotes a prediction from Joseph Muscat, Ernst & Young’s Americas director of cleantech and venture capital, that the renewable energy sector will be “the first to emerge when the market stabilizes”.  Making that prediction come true should be a key objective of the next economic recovery package. It should help small businesses in the green sector not only survive the financial crisis, but come out of it stronger than ever to capture their share of the domestic and global green markets.

In addition to getting capital moving again and creating jobs through green infrastructure investments, Congress and the new Administration should strengthen and green the SBA. The SBA is the nation’s principal source of federal aid for small companies, but it traditionally has been a bureaucracy without much status. Its leaders too often have been appointed because of their political connections rather than their business expertise.

Obama’s selection to run the agency is Karen Gordon Mills, a venture capital expert, a founding partner of a New York equity firm and chair of Gov. John Baldacci’s Council on Competitiveness in Maine.  Mills also is a director of Scotts Miracle-Gro, a company that produces a plant food which “grows plants twice as big organically”.  A healthy application of fiscal Miracle-Gro is just what the green small business sector needs right now. Here are some suggestions:

Providing Green Capital: The SBA’s loan and capital programs should give top priority to U.S. companies that design, engineer, manufacture, distribute, assemble, service or install renewable energy and energy efficiency equipment. Several of the agency’s programs can be used this way, including the Small Business Loan Guarantee, or “7A” program; the 504 Certified Development Company (CDC) program; and the Energy Conservation and Pollution Control loan programs. Green entrepreneurs should also be given priority in the Small Business Investment Center program,which leverages debt and equity capital for small companies, and in SBA’s micro loans for very small firms.

Congress should pump more capital into these programs. In addition, U.S. Sen. Chuck Schumer has proposed that tens of billions of dollars be allocated to SBA for direct emergency loans for small businesses – not a bad idea.

Spurring Innovation: Mills should rally America’s small businesses to do what they do best – innovate. A green energy economy will require transformative new technologies for transportation, buildings, power production and energy storage. Mills should champion the idea of a $1 billion “platinum carrot” fund to reward breakthroughs in green technologies by small companies over the next five years.  She should work with the Department of Energy to increase the number of cooperative research agreements between small companies and DOE’s national laboratories, collaborations that give small companies access to world class laboratory facilities they cannot afford on their own.

Providing Green Skills Training and Technical Assistance: SBA has special programs to help veterans, women, Native Americans and other minority entrepreneurs create small enterprises. The agency oversees a national network of Small Business Development Centers  and partners with the nonprofit Service Corps of Retired Executives to help new business get started. SBA should provide training in green technologies and markets for these mentors so they are better prepared to help aspiring business owners develop realistic and successful business plans.

Capturing Global Green Markets: The world market for green energy and environmental services has been growing rapidly and will surge again when the global economy stabilizes. It will be driven not only by an international agreement to reduce greenhouse gas emissions, but also by the long-term increase in fossil energy prices and by efforts such as the United Nations Environment Programme’s “Global Green New Deal” – an initiative to create sustainable paths out of poverty.  SBA’s Office of International Trade helps small companies secure export capital and link with overseas business opportunities. Mills should make sure that office is focused like a laser on emerging international green markets.

Mobilizing Other Federal Resources:  Several other agencies offer programs for small businesses; they should be expanded and SBA should help companies participate in them. Examples include the Environmental Protection Agency’s  Energy Star for Small Business program, which helps companies learn about energy efficiency opportunities, and the Department of Energy’s Industrial Assessment Center program, in which engineering faculty and students from 26 universities around the country conduct free energy audits for small and medium-sized manufacturers. The cost-cutting opportunities identified by these programs can be financed by SBA loan guarantees.

Creating “Climate Enterprise Zones”: Some communities will be harder hit than others by climate policies. For example, the nation will use less fossil fuel if carbon pricing is successful, with an adverse impact on the workers and communities in oil and coal country. The Presidential Climate Action Project has recommended that the Obama Administration create “Climate Enterprise Zones” in which federal and state economic development assistance is used to encourage green industries to locate in these communities and to retrain workers. Several existing federal economic development programs can be refocused in this way, including SBA’s Emerging 200, and  Community Express initiatives. The Community Express program streamlines SBA’s loan programs for “underserved” and economically distressed localities. The Emerging 200 program provides mentoring, training and other services to 200 of the nation’s most promising inner-city and rural entrepreneurs. In 2008, the program targeted entrepreneurs in only 10 cities (Boston, Baltimore, Philadelphia, Atlanta, New Orleans, Memphis, Chicago, Des Moines, Milwaukee and Albuquerque). Mills should champion and expansion of these programs and the number of communities they serve.

Adapting to Climate Change: SBA provides disaster recovery loans for property owners of all types who suffer losses from natural disasters. These loans should give higher priority and lower interest rates to building owners who reconstruct to meet Energy Star or LEED standards, as well as standards suitable for withstanding extreme weather, drought, wildfires and other adverse local impacts of climate change. The disaster recovery centers SBA establishes to help disaster victims should provide information about green reconstruction. In addition, Mills should work with Congress to restrict loans to building owners who want to reconstruct in hazard areas. Extreme weather events, already increasing in the United States, will drive up taxpayer costs for disaster response and recovery. Home and business owners who want to rebuild in these areas should do so at their own expense and risk.

Helping Green the Government: SBA helps small business obtain federal contracts. One of President-elect Obama’s priorities will be to green the federal government, which will provide new contracting opportunities for companies offering sustainable products and services. SBA should redouble its effort to link small companies with those opportunities.

So far it has been the big companies that have made the most noise about what will happen if the federal government doesn’t help them survive the economic crisis. But the sector that’s truly “too big to fail” is America’s millions of small businesses. With a little enlightened assistance from Washington, they can be the engines that pull the United States into a sustainable 21st century economy.