Job creation datapoints of the day

By Felix Salmon
March 8, 2010
argue at length about just how many dollars it costs to create one job in the infrastructure field, but whatever numbers you come up with, they're going to be much higher than, say, the numbers that Linda Levy, the CEO of Lower East Side People's Federal Credit Union, gave me for our small-business lending. (I'm on the board there.)


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Lending to small businesses is often a spectacularly good way of creating jobs — and almost always creates more jobs per dollar spent than any kind of infrastructure investment. One can argue at length about just how many dollars it costs to create one job in the infrastructure field, but whatever numbers you come up with, they’re going to be much higher than, say, the numbers that Linda Levy, the CEO of Lower East Side People’s Federal Credit Union, gave me for our small-business lending. (I’m on the board there.)

We’ve made 25 small-business loans of late, averaging $17,000 apiece. Linda reckons that on average each loan means the retention of one job, since someone with a job would lose it were it not for the loan. But put that to one side; she also says that the 25 loans, between them, have resulted in 10 brand-new full-time jobs as well. That’s $42,500 per job created, which is a pretty good number.

The insight here is that small businesses don’t tend to hire people who don’t pay for themselves: the small-business loan just gives the necessary push to make that job possible in the first place. And small businesses tend to be more labor-intensive than capital-intensive, so new loans are likely to be transformed into new employment.

Of course, if you look at poorer countries, the dollars-per-job-created figures are more impressive still. Here’s the latest press release from the Sustainable Preservation Initiative, about a new project it’s funding in Peru. With a single grant of $48,000, the SPI is helping to turn an important archeological site into a source of tourism-related cash for a poor local community, thereby creating an enormous incentive to protect that site rather than looting it or building on it. And, of course, creating jobs, too:

Together, the workshop, store and tourism activities are expected to create more than twenty additional jobs during the construction period and ten or more new permanent jobs thereafter.

That’s less than $5,000 per permanent job created — plus 20 construction jobs thrown in, as it were, for free.

In general, if you want to create the maximum number of jobs for the smallest amount of money, the best way of doing so is to provide catalytic capital which helps to give a small business the step-up it needs to sustain new jobs on a permanent basis. The problem is that finding such businesses, and underwriting loans to them if you’re giving out loans rather than grants, is expensive and time-consuming, and it’s hard to scale on a national basis. But when it works, it can work spectacularly well.

7 comments

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Is it too hard for such small businesses to raise equity capital or some non-debt equivalent?

Posted by polit2k | Report as abusive

@polit2k: I’m not sure how a small business would raise equity capital except through an angel investor or VC (family members possibly, but that opens up entirely new issues). Angels are difficult to get access to and typically don’t invest in more than one or two at a time, and VCs won’t touch you unless you have an exit strategy (acquisition or IPO) that has a good likelihood of making them a lot of money. These options leave out the vast majority of small businesses in the US.

Posted by Curmudgeon | Report as abusive

@Cumudgeon: Yes, that’s my thinking too. The normal source is family and friends but as the pool of debt free citizens dwindles and loans are the only way to get off the ground, once more the overall debt increases. VC’s are no solution unless you have a track record and are planning on being much more than a small business with a clear exit strategy for them. The frequent mention of banks not lending to business normally means that a business needs risk capital. It used to be that low gearing was a good thing:-)

Posted by polit2k | Report as abusive

Small business hire people in response to increased demand, not availability of capital. If a small business is looking for capital, whether it is in the form of a loan or an investment, it’s risky to hire people with that money. Maybe if you’re getting a large angel or VC investment, you’d use that money to hire people, but if you’re taking out a loan, its probably not directly for hiring. Hiring is more likely a side effect of deploying that money elsewhere.

Posted by ameyer | Report as abusive

I have opened a home care company and could use a small loan to get it up and running. I dont have the best credit would I still qualify for goverment assistance for a small business ? I already have 30 employess and counting. which type of finacial institue is more likely to help a federal credit union or a bank ? Im not sure if you answer questions like this any direction would be appreciated.

Posted by nurse74 | Report as abusive

I work for a small business finance company. The majority of our clients, use the money for expansion, to manage cashflow, invest in inventory etc… Sometimes the business owner owes back wages or can’t make payroll, so we end up saving job’s, but it is less common that the capital ends up creating jobs.

That being said, we have a comparatively lax approval process, and getting funding from us is generally more expensive than getting a loan from a credit union. It’s possible that business owner’s are more likely to spend credit union loans on hiring additional employees.

I agree with ameyer. In general the availability of capital helps small business grow. Thriving small business, means more jobs in the long run and a more robust economy. Ultimately jobs are created by demand. Well used capital creates demand not jobs.

http://www.fundingapp.com

Posted by SamGreenburg | Report as abusive