Politicians are fond of saying that small businesses are the backbone of the economy. And while standing up for the little guy is a popular way to win over voters, there’s actually some truth to that assertion.
The U.S. Small Business Administration (SBA) reports that smaller companies – those with fewer than 500 employees, by the SBA definition account for more than two-thirds of all the new jobs created since the 1970s. They’re also responsible for a lot of innovation, as many ultra-successful tech startups have proven in recent years.
But in a number of respects, small businesses are at a distinct disadvantage compared with their larger competitors. And that’s why some argue that government policies that favor these big firms are important. Here are five areas where business size is an advantage:
1. Raising Capital
At some point, businesses need to raise outside capital if they want to expand. If a large corporation plans to hire new workers or build a new factory, it has the ability to sell bonds or issue stock to the public. But smaller organizations don’t have that flexibility.
Small-scale operations tend to be much more reliant on bank loans. One of the goals of the SBA is to encourage banks to lend by guaranteeing the value of loans made to these businesses.
One of the reasons big corporations have a leg up on smaller rivals is that they benefit from economies of scale – that is, the cost for each product or service they deliver is lower.
Imagine trying to build just one table. Chances are, you’d spend a lot of money investing in tools and purchasing the raw materials – and a good deal of time getting the pieces to fit just right. But building a second table is cheaper than the first because you can buy all the materials at once and depreciate the cost of the equipment. And a third is cheaper still. That is how efficiency develops.
Large businesses produce large quantities, whether it’s pieces of furniture or electronics or bakery items. So, they can keep the total expense for each piece they manufacture very low.
3. Purchasing Power
Another way large corporations keep costs down is by negotiating for lower prices. Take, for example, a big automaker that has to buy steel in order to make its cars and trucks. Because of the large volume the carmaker is ordering, the supplier has an incentive to lower its price per ton.
It would be hard for a much smaller competitor to get the same deal. The steel company simply doesn't have as much reason to bend its price. And if the firm is paying more for raw materials, it’s receiving a smaller profit on each car that it sells.
The lack of purchasing power affects virtually every cost that a business takes on, from telephone service to real estate. It particularly affects healthcare costs, which represents one of the biggest expenditures for companies today. The Small Business Health Options program, part of the Affordable Care Act, is trying to provide a more level playing field by giving small firms more purchasing power in the insurance market.
4. The Talent Gap
Every business owner knows that in order to excel, you need the best workers available. But it’s much easier for big players to attract high-level employees because, in most cases, they can afford to pay them more.
What small businesses lack in compensation they can sometimes make up for in non-financial perks, like the ability to move up the ladder more quickly. Some also offer benefits like flex time and telecommuting opportunities in order to woo employees who might want to chase a bigger paycheck elsewhere.
5. Name Recognition
The easiest way to get a sale is to make sure the customer already has your brand in mind before they start shopping. That’s often the case with big corporations, which have the marketing muscle to advertise much more than their smaller rivals.
A lot of the big-name companies have also been in business for decades – just think about McDonald’s, IBM or Nike. That means they’ve had years of exposure in the marketplace.
The Bottom Line
Some people think that bigger companies take advantage of small businesses, which are the underdogs. The truth is smaller companies have a number of factors working against them that they may have to overcome in order to be successful.