Small businesses are the backbone of the American economy, driving innovation, creating jobs, and strengthening communities in every corner of the country. Their impact, however, goes far beyond statistics. Small businesses are a lifeline for local economies, a source of opportunity for women, minorities, and immigrants.

Yet, for all their potential, many small businesses face a critical barrier in business development that is access to flexible, affordable financing. That’s where SBA funding comes in. By guaranteeing loans through partner banks and credit unions, the SBA enables entrepreneurs to secure capital, hire staff, acquire equipment, and grow, even when traditional financing is out of reach. For financial institutions, supporting small businesses isn’t just a matter of commercial opportunity but an investment in the nation’s economic resilience and a partnership in building stronger communities. This article explores why small businesses matter, how SBA funding is transforming access to capital, and what banks and credit unions can do to amplify this impact.

What’s considered a small business?

The U.S. Small Business Administration (SBA) generally defines any independent business with fewer than 500 employees as a “small business.”

Small businesses are 99.9% of all businesses in the US. As of July 2024, there are 34.8 million small businesses compared to 19,688 large businesses.

These small firms employ 59 million people, or 45.9% of all private-sector employees, and are responsible for 61.1% of overall job growth since 1995.

Why small businesses are so important

Aside from the economic impact, small businesses contribute much to the communities and people that they serve. Here are 5 reasons small businesses are important and how they enrich their communities across the country.

Small businesses create jobs

Small businesses promote self-sufficiency in local economies and their residents by providing employment opportunities to local workers. The U.S. Chamber of Commerce’s Small Business Data Center confirms that small businesses employ nearly half of the American workforce, representing about 43.5% of America’s GDP. 

Small business revenue stays in local communities

Small businesses employ local residents, directly returning some of the money they generate to community members. Additionally, small businesses often support other local small businesses as customers or suppliers. For example, a chef at a local restaurant might stop by the neighborhood farmers’ market for the procurement of fresh, homegrown produce for weekly specials and menu items. 

Small businesses spark innovation

In recent years, large companies nationwide have adopted the concept of thinking like a startup to prioritize innovation and gain a competitive edge. This small business innovation research can transform neighborhoods, towns, and cities. 

Small businesses help communities thrive by driving innovation and serving needs that otherwise would likely be unmet. They are engines of growth, creators of jobs, builders of communities, and the manifestation of technological advancement. Small businesses drive the spirit of entrepreneurship through ideas, progress, and opportunity. Small employers have created more new jobs since 1995, and they innovate at a better rate than their larger business competitors.

Small businesses increase the tax base

Local businesses generate local taxes, including the property taxes they pay on buildings and the sales taxes they generate from selling goods and services. This tax revenue is reinvested into the community to improve roads, fund schools, and keep parks in good repair. In contrast, taxes paid to e-commerce retailers or national companies typically don’t benefit local communities.

How SBA is helping small businesses

The SBA is a federal agency, and it offers substantial educational information with a specific focus on assisting small businesses to develop and grow. The agency provides SBA funding and has numerous initiatives for businesses that can be accessed on its website, including a small business planner and additional training programs.

According to its website, sba.gov, the SBA provides the following services to small businesses:

  • Access to capital: The agency offers a variety of SBA-guaranteed financial resources for small businesses, including microlending, or low-interest rate small loans that are issued to those borrowers who wouldn't otherwise qualify for financing. Loans are issued by partner banks, credit unions, and other financial institutions.
  • Entrepreneurial development: This is driven by counseling services and low-cost training provided by the SBA and is available to both new and existing business owners in more than 1,800 locations across the United States. There's also a mentor program that connects new business owners with retired and/or existing entrepreneurs for research and development purposes.
  • Contracting: The SBA reserves 23% of government contracting dollars for small businesses with the help of other federal departments and agencies. The agency guarantees 5% of these contracting dollars for women and another 3% for business owners who are disabled and veterans.
  • Advocacy: The agency acts as an advocate by reviewing legislation and protecting the interests of small business owners across the country. The agency also advocates for business owners at the state and federal government levels.

The agency has helped countless small businesses across the country get access to loans, loan guarantees, contracts, and other services.

The History of the SBA

The SBA was established by President Dwight Eisenhower when he signed the Small Business Act in the summer of 1953. It replaced the Reconstruction Finance Corporation (RFC), which was created under President Herbert Hoover in 1932 after the Great Depression. The mandate of the newly formed SBA was to aid and protect the country’s small businesses and ensure that they received a fair portion of government contracts and surplus property sales.

The SBA has had a rocky history. In 1996, the agency was under threat of being eliminated by the House of Representatives. However, the agency survived this threat and went on to receive a record budget in 2000. There was also a lot of resistance to its loan program, which led to repeated cuts between 2001 and 2004. That’s when certain SBA expenditures were frozen altogether.

Small business owners were among the hardest hit during the COVID-19 pandemic. The SBA funding helped these owners, providing them with two different types of funding:

  • Economic Injury Disaster Loan (EIDL): This program was designed to let businesses use approved funds for working capital and other day-to-day expenses. As capital is loaned, it must be repaid. The SBA stopped accepting applications as of January 1, 2022, and as of May 6, 2022, stopped accepting loan increase requests or requests for reconsideration of loan applications that had previously been declined.
  • EIDL Advance Programs: Funds were granted to people who filed for EIDL assistance as long as they met certain criteria. Unlike the loan program, funds approved through this program don’t have to be repaid.

The SBA Loan Program

The SBA funding programs offered through the SBA are among the agency's most visible offerings, and they come with longer repayment periods for small businesses. The agency doesn’t actually issue loans itself (with the exception of disaster relief loans). Instead, SBA fundings are backed or guaranteed by the SBA and issued directly by lenders that meet the agency’s guidelines.

Loans backed by the SBA funding include:

  • The 504 loan (or the grow loan), which provides a small business with up to $5.5 million in financing to buy the fixed assets it needs to run its operations, including real estate.
  • The 7(a) loan is the agency's primary loan program. The maximum loan amount guaranteed under this program is $5 million.
  • A SBA disaster loan program is intended to help businesses and homeowners recover from declared disasters and provide disaster assistance
  • Microloans of up to $50,000 (the average amount is about $13,000) are meant to help small businesses and some nonprofit childcare centers start up or expand.

Loan applications of small businesses qualify for loans more easily when they are guaranteed by the SBA. The agency also allows entrepreneurs to make lower payments for a longer period of time. Despite numerous attempts to do away with the SBA funding entirely, many political officials and offices continue to support it. The SBA’s ability to offer loans was also significantly strengthened by the American Recovery and Reinvestment Act (ARRA) of 2009 and the Small Business Jobs Act of 2010.

The SBA has local offices throughout the United States and associated territories that provide more personalized special events for small business owners. These offices provide in-person, one-on-one counseling services that include instruction on writing a business plan and assistance with small business loans.

Conclusion

Small businesses are community anchors, innovation labs, and engines of economic mobility. Their growth and stability depend on access to capital, and SBA funding has proven to be a transformative resource for millions of entrepreneurs. By guaranteeing loans, offering counseling, and advocating for small business interests, the SBA creates a framework for success. But the real difference is made when financial institutions step up as active partners and simplify access to SBA funding, providing guidance, and celebrating small business wins.

Ready to grow your business? Explore SBA funding options with your local bank or credit union today.

FAQs about SBA Funding

1. What is SBA funding, and how does it work?

SBA funding refers to loan programs backed by the U.S. Small Business Administration, which guarantees a portion of loans issued by partner banks and credit unions. This reduces risk for lenders and makes it easier for small businesses to secure financing with favorable terms.

2. What are the requirements for a Small Business Technology Transfer (STTR) proposal?

In an STTR proposal, the startup must perform a minimum of 40% of the research, as measured by the budget. And a minimum of 30% of the research must be performed by the partner research institution.

3. Who is eligible for (Small Business Innovation Research) SBIR?

Only small businesses with 500 or fewer employees pass the eligibility criteria. Applicants for the SBIR programs must be for-profit companies. Only small businesses with minority ownership by venture capitalists are eligible.

4. Does SBA funding need collateral?

In most cases, SBA loans require collateral. This could be equipment, property, or another valuable asset that protects the SBA and the lender in case the borrower defaults on the loan.

5. Why should banks and financial institutions support small businesses through SBA programs?

Supporting small businesses with SBA-backed loans allows financial institutions to serve a wider customer base, reduce lending risk, strengthen local economies, and build lasting community relationships. These programs with SBA funding often result in higher approval rates and positive repayment histories.