Big economic news often grabs the headlines. But amidst the hoopla surrounding a new distribution warehouse, manufacturing plant, or national retailer, the quiet power of small businesses is fuel for the engine that drives the local economy forward. When local business owners and civic leaders encourage residents to support small businesses, they are not just doing it out of self-interest. They know that dollars spent locally stay local, supporting the community and way of life in surprising ways.

Public figures like to describe America’s small businesses in terms like “the backbone of the American economy.” They court the support of small business leaders because they know how closely these entrepreneurs are woven into the fabric of the community. Without the mom-and-pop shops, small manufacturers, local financial institutions, accounting firms, convenience stores, law firms, car dealers, funeral homes, and auto repair shops (to name just a few), the economic landscape would look much different. 

The question is, what exactly is a “small business”? The Small Business Administration (SBA), an independent federal agency, defines a small business as an enterprise with 500 or fewer employees. That covers a lot of ground, and the SBA sets different minimums in different industries, but the 500-employee threshold is the most widely used.

Using that definition as a guide, the SBA classifies 99.9 percent of Americas businesses as small businesses. That adds up to 34.8 million small businesses across the nation, versus 19,688 businesses with fewer than 500 employees. Many of them are homegrown, boosting the local economy by creating jobs and providing goods and services to local residents, visitors, and other businesses.

“We’re very fortunate we have a great blend of big and small businesses in our community,” said Rick Swan, Executive Director of the East Peoria Chamber of Commerce. “It used to be you pitted the big business against the small business. We never would do that because we feel that each one complements each other.”

More than 61 million Americans are employed by a small business, representing 45.9% of the workforce. Small businesses are responsible for 44% of the Gross Domestic Product.

Nationally, small businesses account for 61.1% of total job growth since 1995. That growth has been on the upswing since the COVID-19 pandemic. SBA numbers show that small business applications grew 25% in 2020. In 2023, a record 5.5 million new business applications were submitted. 

While there is no universal list of the impacts of small businesses on a community, economists often talk about these:

Small businesses create jobs. For millions of small businesses, the only employee is the owner. Others have a small workforce drawn from the community or the region. Considering there are more than 34 million small businesses out there, those numbers add up. The SBA estimates that small businesses have created 12.9 million jobs over the past 25 years.

Small businesses support the local economy. Studies have shown that for every $100 spent at a local business, $68 stays in the local economy. This is in the form of employee wages, services, and goods from local suppliers. By contrast, when the same $100 is spent at a larger business that might be owned outside of the community, only about $48 stays local. That is not to say that local small businesses are more important than larger corporations; all are needed for a robust, growing economy.

Small businesses generate tax revenue. Property tax, sales tax, and special use taxes are among the levies that pay for the local services and amenities that residents enjoy. Schools, police and fire departments, municipal water and sewer, roads, parks, cultural events, and much more are funded in whole or in part by the taxes paid by all businesses and residents.

Small businesses are innovative. The U. S. Chamber of Commerce says businesses with five to nine employees are granted more patents per employee than any other size business. Without a dense corporate structure or cumbersome approvals, new ideas reach the marketplace faster. That spirit of innovation can also generate competitive pressure within an industry and drive productivity.

Small businesses create community character. Tourists and prospective new residents may be attracted to the experience created by small business economy. And since the business owner often interacts with customers on a regular basis, there is greater opportunity for quick feedback and a more personalized experience.

Small businesses support the community. Small businesses with roots in the community often support local charities, sports teams, the arts, and other worthwhile causes that enrich local lives. They have a direct stake in the success of initiatives that are important to employees. 

Small businesses are environmentally sustainable. When they source supplies, services, and other resources locally, small businesses leave a smaller environmental footprint than large businesses with global sourcing and supply chains.

In spite of record growth in the past five years, small businesses still face headwinds to long-term success. According to the U. S. Bureau of Labor Statistics, the common belief that half of businesses fail in the first 12 months is not true. BLS data says that 20.4% of businesses fail in the first year (still not a small number, but much less than half), 49.4% fail in the first five years, and 65.3% fail in 10 years. Since the pandemic, a lack of labor and rising costs are often cited as reasons for failure. Lack of demand and capital are two of the most common reasons cited.

Another common myth: 90% of restaurants fail in their first year. BLS cites a report indicating that only about 17% of restaurants fail after one year. That rate is significantly lower than other businesses in service industries.

“Online shopping is more of an issue to small businesses than anything,” Swan said. Many local businesses are becoming more competitive by offering their own online services, but convenience and an almost endless array of goods still has a strong appeal to many consumers.

What can an individual do to support and encourage small business in the community? 

Shop local. Given a choice, choose local goods and services for all the reasons already discussed.

Spread the word. Tell your family, friends, and coworkers about your small business shopping experience. Boost the impact by leaving a review on the business’s website or on social media.

Engage with them. Get to know the owners and others who keep the business going. The more you know about each other the more likely you are to do business.

Be patient. If service doesn’t seem to be up to standards, remember: Small enterprises don’t have access to the same resources as bigger companies. But what they lack in speediness, they often make up for in flexibility and accommodation of local needs.

Swan knows that it takes a combination of large and small businesses to keep a local economy humming. “We support everyone,” he said.

There is ample evidence that small businesses are the heart of a community. They create jobs, opportunities, and local pride. They generate taxes for community services. They quickly adapt to the needs of their customers. And in light of their tremendous impact, everyone has a role in keeping small business strong and growing.