IBM Impact Grants

Understanding the Importance of Small Businesses to Low-Income Communities

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America’s small businesses are critical components of the national economy. The jobs, wealth, and social and cultural capital they create are essential to thriving communities and sustained economic development. That’s why communities and the broader economy suffer when small businesses in low-income and distressed neighborhoods are unable to obtain the capital they need to grow and create new jobs. It’s also why our newly developed ability to detail the economic potential of small businesses in low-income communities is so important.

 The Association for Enterprise Opportunity (AEO) promotes innovation in microfinance and microbusiness across the U.S. In 2014, we received an IBM Impact Grant for Data Analytics Consulting that enabled us to publish this year a first-of-its-kind “Big Data” analysis of the role small businesses play in low-income communities. Our report – The Big Picture: A Larger View of the Small Business Market – represents an important first step in understanding this critical market sector, and demonstrates that Big Data analytics can play an important role in advancing the understanding of small businesses in low-income communities.

To construct our study, we worked with IBM consultants for four weeks to develop a framework for sizing and segmenting the universe of small businesses in low-income communities. After we established that framework, the IBM team performed sophisticated segmentation and clustering analyses to examine the number, location, and defining characteristics of the smallest businesses in low-income communities.

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The analysis yielded several key insights:

  • Small businesses in low-income communities are numerous – representing more than 40 percent of all small businesses in the U.S.
  • The vast majority of small businesses in low-income communities are microbusinesses with zero to four employees.
  • Though broadly distributed throughout the nation, the overwhelming majority of small businesses in low-income communities are located in metropolitan areas.
  • Thirty-three percent of small businesses in low-income communities are five years old or younger, with a median age of eight years.
  • The majority of low-income community small businesses are concentrated in services, retail and construction – capital-light industries with low barriers to entry.
  • In the aggregate, small businesses in low-income communities generate $1.87 trillion in annual revenue – a powerful economic force.
  • More than two million of these businesses seek credit each year.

These findings are critical because this is the first time the industry has sized the market opportunity for underserved entrepreneurs. Furthermore, the findings help advance AEO’s mission in three ways:

  • Contributes to our fact base for national advocacy and policy activities
  • Guides our innovation work – we’re building infrastructure to reduce costs to reach and serve these business owners in collaboration with banks, tin tech companies, government and nonprofits
  • Enables us to help member organizations around the country focus their efforts and mobilize support

We believe this information will advance our mission by enabling better resource allocation through helping us clarify the location and characteristics of market demand for this important segment of our economy.

Tammy Halevy is Senior Vice President for New Initiatives at the Association for Enterprise Opportunity.

Related Resources:
Download The Big Picture: A Larger View of the Small Business Market
Follow AEO on Facebook and Twitter
Learn More About IBM Impact Grants

Senior Vice President for New Initiatives at the Association for Enterprise Opportunity

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