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Este informe no está disponible en español. CARIBBEAN BUSINESSThe Little Engine That Can:Small Businesses Generate 63% Of All New Jobs, And Account For 48% Of Puerto Rico’s EconomyWith no fanfare, small businesses have become the driving force behind the island’s thriving economyby JOSE L. CARMONAJuly 13, 2000 If you thought the contribution of the small business sector to the island’s economy was …well…small, think again. The number of small businesses in Puerto Rico has surpassed 100,000. They generate 63% of all the new jobs and 48% of Puerto Rico’s gross product (GNP). These estimates, based on U.S. Census Bureau data and a 1999 study by research firm Estudios Tecnicos, confirm what many already know–that small businesses are the engine that keeps the Puerto Rico economy going. And when we talk about small businesses, we really mean small. U.S. Census Bureau data released last September show that 95% of all businesses in Puerto Rico employ less than 50 workers and 60% of them have one to four employees. According to Ivan Irizarry, the U.S. Small Business Administration (SBA) Puerto Rico and U.S. Virgin Islands district director, the local small business community is growing in size and strength. "During fiscal year 1999, the growth of small- and medium-size business establishments in Puerto Rico was 4%, with an average growth of 4.8% for the last 6 years," said Irizarry. "The growth industries within the small business sector are services, retail, finance, construction, transportation, and certain sectors in manufacturing." How small is small? Unfortunately, there is no universal definition of what a small- or medium-size business is in Puerto Rico. Both the SBA and Puerto Rico’s Commerce Development Administration (CDA) use industry sector, number of employees, and annual revenue as basic criteria in their definitions. Then again, the number of employees or annual revenue for a business considered small will depend on whether it is engaged in manufacturing, construction, wholesale trade, etc. Different criteria for being a small business are used for different types of businesses. What SBA and CDA consider a small business varies greatly. CDA criteria are more restrictive, generally considering firms with more than 50 employees and $5 million in annual revenue to be "large" businesses. For the CDA, a retail establishment is considered a small business if it has annual revenue of up to $500,000, while for the SBA, that number could be as high as $21 million. Actually, most businesspersons consider the SBA numbers more realistic. How many are there? Neither CDA, nor SBA keep accurate accounting of how many small businesses there are in Puerto Rico. Nor does the Puerto Rico Planning Board keep statistics specifically relating to that economic sector. But a fairly close approximation may be estimated when all available data on sizes of businesses in Puerto Rico are considered. According to the most recent issue (Sept. 1999) of the County Business Patterns, an annual publication of the U.S. Department of Commerce’s U.S. Census Bureau, in 1997, there were 42,463 payroll establishments in Puerto Rico. Of those, 41,350 (or 97.4%) employed less than 100 people; 40,163 (94.6%) employed less than 50, and 36,845 (86.8%) had less than 20 employees. But that’s not even the half of it. Those numbers specifically exclude businesses run by self-employed persons, including sole proprietors who run a business by themselves or with the help of non-payroll employees. Such is the case, for example, of small vendors who employ non-remunerated family members in the business. Earlier U.S. Census reports have estimated the number of those self-employed business establishments to average approximately 60% of the total number of business establishments in Puerto Rico. Based on the most recent data available, that number is approximately 63,700. By definition, all of them are small businesses. According to those figures, the total number of small businesses in Puerto Rico would be around 100,000. Similarly, if we look at revenue, the vast majority of businesses in Puerto Rico would have to be considered small. On the mainland U.S. as a whole, a business with annual revenue of up to $250 million is generally considered small. In Puerto Rico, there are only a handful of local businesses of that size. For example, among companies listed in the CARIBBEAN BUSINESS 300 largest locally owned businesses, only nine companies had 1998 revenue in excess of $250 million, 207 companies had more than $20 million and only 276 had revenue of $12 million or more. (CB Book of Lists 2000). Although the list includes only locally owned companies, it gives a fairly good indication that judging by revenue, the vast majority of businesses in Puerto Rico would have to be considered small businesses, no matter what criteria are used. The lack of reliable, consistent data on small businesses in Puerto Rico will soon be a problem of the past. Next month, CDA expects to unveil a new database that should become the official source of information of all registered businesses in Puerto Rico. Using municipal tax records, the agency has created the most complete database ever made of all the businesses on the island. And it will be available online. Called Infomercio, the database will provide government agencies, merchants associations, and small-business entrepreneurs valuable information on the island’s business sector. According to CDA Administrator Luis Velez Boada, one of the preliminary findings from Informercio shows that 90% to 95% of all businesses paying municipal patents are small businesses, and approximately 47% of all new jobs come from businesses with 20 employees or less. Those estimates roughly corroborate U.S. Census data. "The commerce sector in Puerto Rico is very vigorous, with a 10-year sustained growth," said Velez Boada. "When compared to 1990, the growth of retail sales has been more than 45%, growing at an annual rate of about 5%." Approximately 75% of all businesses in Puerto Rico are engaged in trade (both wholesale and retail) and services. The proportion may be even higher among small businesses. "The commerce and services sectors are mostly responsible for the relatively low 10% unemployment rate we currently enjoy, the lowest rate in 30 years," Velez Boada stated. And lately, the role of these sectors as the main creators of new jobs has become even more significant. "The commerce and services sectors create two jobs for every other job created," Velez Boada said. "Job growth in these sectors is 56% higher than the total job growth." "Small- and medium-size businesses are the essence of commerce itself, because it’s the retailers who sell the products from the big distributors," said United Retailers Association President Emilio Torres. "We are the wheels that move commerce." Small- and medium-size businesses have created and maintained more jobs than manufacturing has, Torres added. For every million dollars produced in the commerce and services sector, there are 193 jobs created. That’s nearly five times more than manufacturing, which accounts for 40 jobs created for every million dollar produced, Velez Boada indicated. Financing small business growth Although statistics from the SBA indicate a small reduction in the number of SBA guaranteed loans last year, local private banks report an increase in direct loans to small businesses. SBA’s Irizarry has a very reasonable explanation for this–when the economy is good, banks are more willing to give the loans directly, without requiring the SBA guarantee. "Whenever the economy is doing well, there is less need for SBA. The private banks are in the position to give the loans directly–they don’t apply as much for the SBA loan guarantee. Thus, the competition among banks is ferocious." During fiscal year 1999, the local SBA district office guaranteed 720 small business loans (in Puerto Rico only) for a total of $103 million. That’s 4% less than the previous year’s 752 loans for $113 million. This reduction continued a downward trend in SBA lending that started in 1996 (see chart). "In the last several years, our commercial portfolio has grown 7.5% annually," said Banco Popular Senior Vice President Emilio Piñero. "In the small business sector (loans less than $250,000) our growth has been 3% annually. This year, we will be making over half of the SBA-guaranteed loans, just as we have been doing for the past 20 years." Banco Popular, the island’s largest banking institution, made $50.3 million in SBA-guaranteed loans for the period ended March 31, 2000. Banco Santander reported $22.5 million for the same period, achieving a 47.8% increase in SBA-guaranteed lending. Banco Bilbao Vizcaya and FirstBank reported $5.6 million and $4.3 million in SBA lending respectively during the same period. Evolution The rise of the small business sector as the main generator of jobs in Puerto Rico did not happen overnight. The transition from a manufacturing-based economy to one that is more consumer and service-based, the downsizing of large corporations, and the continued expansion of the U.S. economy have created fertile ground for the growth of small business entrepreneurs in recent years. For Alicia Burgos, Puerto Rico Chamber of Commerce small business committee president, the downsizing of large corporations during the 1980s and 1990s has served as a contributing factor to the growth of the small business sector in Puerto Rico. "Many former managers and employees of large corporations now have their own businesses due to downsizing," said Burgos, who owns her own public relations, advertising, and marketing firm. "Now, they have become suppliers for these and other companies." Other factors have contributed to the growth of small businesses in Puerto Rico. The overall positive performance of the U.S. and Puerto Rico economies, the rapid growth in the areas of information technology (info-tech) and e-commerce, the infusion of federal funds to Puerto Rico as a result of Hurricane Georges, and the integration of more women into the workforce–with many becoming entrepreneurs–have all fueled the growth of the small business sector in Puerto Rico. It’s the economy . . . In the midst of the longest period of sustained economic expansion in U.S. history, the economy of Puerto Rico has benefited by growing at an average of 2.74% in the last decade. That positive economic performance has created a propitious climate for small businesses to thrive. And while prospects of continued economic expansion in Puerto Rico are bright, experts do warn that in times of economic downturns, small businesses tend to be hurt more and sooner. Info-Tech exploxion A recent survey from International Data Corporation, a provider of info-tech industry analysis, indicated that the number of U.S. small businesses engaged in e-commerce would increase from 400,000 in 1998 to almost 2.8 million in 2003. Currently, fewer than 20% of small businesses are selling online (taking orders over the Internet, by phone or fax), the study showed. "We see a tremendous potential in the info-tech and e-commerce sectors, areas that are growing very fast," said Velez Boada. "There are many Internet providers, web page designers, computer programmers, and other support-related businesses in this area, and more are yet to come. The Puerto Rico market is virgin–it’s there for the taking." There are approximately 550,000 Internet users in Puerto Rico, and that number is expected to increase to 700,000 in two years (CB Feb. 24). "We are currently working with the Government Development Bank for Puerto Rico (GDB) and the Puerto Rico Industrial Development Corporation (Pridco) to provide incentives and create strategies in these areas," added Velez Boada, who took over the CDA a little more than a year ago. "We believe Puerto Rico has the infrastructure and technical capacity to develop the info-tech and e-commerce sector." "Right now, e-commerce has an unlimited potential for local businesses, because of our bilingual condition and close ties with the U.S. We can help develop other countries’ e-commerce markets in Latin America and benefit from them," Velez said. "We have the infrastructure and the know-how. There are many opportunities for local businesses." "Two years ago, there weren’t as many computer companies in Puerto Rico as there are right now," said HQ Business Centers (HQBC) President Manuel Morales. "In 1998, the Web was here, but was not booming as it is right now. Small businesses in this sector are growing at a very fast rate." An office "hotel" of sorts, HQBC rents fully furnished offices to start up companies, providing services such as mail receiving, administrative support, phones, and Internet access to small business entrepreneurs. "We currently have about 60 virtual offices in the area of technology," Morales said. "Anything that has to do with telecommunications, communications, Internet, web page design, systems integration, and networking–these areas are growing very fast." At HQBC there’s even an information technology-training institute (Executrain), where people are being educated on everything related to telecommunications and the Internet. "This collective knowledge did not exist a few years ago," Morales noted. "Many of these new small businesses don’t require start up capital, because the capital they need is intellectual, which they already have," the HQBC president explained. "Most of these new entrepreneurs are between 22 and 30 years of age. It makes me happy to see so many young people venturing into these new areas." Banco Popular’s Emilio Piñero has also noticed a change among young entrepreneurs. "During our meetings with students, we see them wanting to start non-traditional, info-tech businesses. It’s a more globalized effort," Piñero said. Chart #1 DISTRIBUTION OF WORKFORCE BY INDUSTRIAL SECTORS Selected Years
Source: Puerto Rico Planning Board CHART #2 SMALL BUSINESS ADMINISTRATION 4-YEAR LOAN APPROVALS FY 1996 — FY 1999 (PUERTO RICO ONLY) IN MILLIONS OF DOLLARS
The infusion of federal funds to Puerto Rico as a result of Hurricane Georges had a stimulating effect on the island’s overall economy and–therefore–to small businesses. The funds were used for infrastructure projects that helped increase the island’s economic activity, which in turn had a multiplier effect within the small business community. "The infusion of federal funds from the Federal Emergency Management Agency (FEMA) to Puerto Rico was $2.5 billion," said SBA district director Irizarry. "In our case, SBA’s total contribution to the economy was $284 million, which is a considerable figure for such a small district." Whenever the President declares a disaster, SBA also provides direct disaster loans to individuals and businesses that qualify. The amount of a loan can reach $140,000 for personal losses and $1 million for business losses. In addition to $110 million in guaranteed loans made in fiscal year 1999, the SBA Puerto Rico and U.S. Virgin Islands district office made 14,683 disaster loans totalling $177 million.
Changes in society’s consumer patterns and needs are another contributing factor for the growth of small businesses. In our society, more often than not, both members of the household work. More mothers–whether married or single–have joined the workforce. Looking for convenience, many have opted to start their own businesses. "There are now more single mothers working. And many mothers have decided to start home-based businesses in order to be with their small children," added Burgos. "Since 1987, women-owned businesses have increased 206% in the U.S." The National Association of Women Business Owners is currently conducting a research study on Hispanic, woman-owned small businesses, which will include Puerto Rico in the study for the first time. The study should be completed by September. The Women’s Business Institute (WBI), a non-profit organization established in 1997 under the sponsorship of the SBA and Sagrado Corazon University, helps women entrepreneurs in their business decision-making by providing technical assistance and seminars. They also help women on social assistance make the transition from welfare into the workforce by becoming entrepreneurs. "During our first year (1997), the institute served 900 people. Right now, it’s more than 3,600," said WBI Director Joy Vilardi. "In less than three years the demand for our services has grown bigger than our capacity to provide them." This year the institute started offering seminars outside the metro area, namely in Caguas and Manati, and plans are to extend seminars to other parts of the island.
Not all the grass is green in the small business garden of Eden. According to Velez Boada, only 12% to 15% of the businesses in Puerto Rico use a computer for accounting, payroll, and inventory. And that is something to be concerned about. "That is a very low number and it concerns me," the CDA administrator stated. "Especially in an economy where information technology is becoming so important. We need to work harder on that." Velez Boada believes that part of the problem is lack of information–businesses are not familiar with computers and the Internet–and that’s one area they need to concentrate on. "It’s not that all businesses need to have a presence on the Internet, but those that can benefit from it should step up," Velez Boada said. "We need to convince small businesses that there is an enormous market they are missing by not being on the Internet, not just here but globally," Velez noted. "Reaching other markets via the Internet, to export our products and services to those markets–that’s what e-commerce is all about." "We keep telling small businesses that they have to be more competitive in a free market, but with what tools?" stated Burgos. In Burgos’ opinion, what small businesses demand are not privileges or concessions, but a competitive edge. Part of the problem, Burgos said, is that for a long time no one has recognized how important small businesses are and what their potential is. "If you come to think about it, who generates more jobs, more sales, and more economic and social stability? Small businesses. Without incentives or subsidies, small businesses generated 63% of all the new jobs in Puerto Rico. Imagine how many more jobs could be created if we provide tools needed to compete," Burgos said. "No one knows for sure how the mega stores and shopping centers are affecting small businesses, but some of them have become suppliers for these mega stores," said Velez Boada. "And the commercial sector around these mega stores and shopping centers are usually revitalized with their arrival." Recently, CDA and the University of Puerto Rico signed a joint agreement to perform a series of economic studies. One of the studies will focus on the effects of shopping malls and mega stores on small businesses. The studies will be completed by the end of September. Another problem faced by some small business owners is their lack of expertise when preparing a business plan or applying for a business loan. Furthermore, many are not well informed of the many special programs currently available to them. "Offices like the SBA, CDA, Small Business Development Center, and WBI offer free financial and technical assistance," said Burgos. "The more accurate information you provide, the better the chances you’ll have to get approved for a small business loan. On many occasions, applicants aren’t turned down because they don’t qualify, but because information is mistaken or incomplete." "We need to be proactive–to go out and promote our products and services. I want to bring the complete range of SBA programs to the municipalities in the central region, where financial and technical assistance is needed," said the SBA district director. "That’s what we’re here for." "We have special programs directed to women, veterans, and minorities–those are special targets for the SBA. We want to make sure that every small business entrepreneur has an opportunity to partake in the economic dream of owning a business," added Irizarry. "We are No. 1 in aid and assistance to small businesses. This is what Congress designated the SBA to do–aid, counsel, and assist the small business community, help them access capital, and provide management and technical assistance." But amidst these concerns, the general consensus is that small businesses in Puerto Rico are in good shape and they should continue to grow in the years ahead. This Caribbean Business article appears courtesy of Casiano Communications.
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