03/29/2011 10:07 am ET | Updated May 29, 2011

Budget Cuts Threaten America's Smallest Businesses

Budget cuts can have a very real effect on our nation's smallest businesses and the organization's that serve them.

I'm not referring to the well-off entrepreneurs, those with high incomes who might run a small office. Rather, I'm referring to the estimated 10 million mom-and-pop businesses whose owners have low-to-moderate incomes. These companies with five or fewer employees, also known as "microenterprises," often generate significant employment in many of the regions hardest hit by the most recent recession.

According to a recent census conducted by FIELD at the Aspen Institute, there are an estimated 696 microenterprise organizations across the U.S. Two-hundred and sixty-three of those organizations provide loans to microenterprises that, for a myriad of reasons, cannot access credit from traditional sources to start or grow their businesses.

So what's on the table in the budget proposals of both parties? Substantial cuts to key programs serving microenterprises both through the Small Business Administration (SBA) and the Community Development Financial Institution Fund (CDFI Fund) are proposed.

Specifically, President Obama's budget proposes to eliminate PRIME (Program for Investment in Micro-Entrepreneurs) funds that go towards the training of micro-entrepreneurs, and a 50 percent reduction in training dollars linked to the provision of capital under the SBA Microloan program. Proposals for cuts at the CDFI Fund could be just as dramatic. The bill proposed by the House contains reductions in funding for the agency by 81 percent, curtailing programs that provide funding and low-cost capital to lenders across the U.S.

A recent report released on the scale and scope of the microlending industry speaks to the ripple effect that deep cuts to this area can have on small businesses. Of those microlenders surveyed in the report, federal funding makes up 31 percent of their aggregate operating budgets.

So what does this country give up by not investing in these small enterprises? For starters, consider the diversity of businesses supported by microlenders. While they include street vendors and daycare providers, food producers and artisans, they also include retail and wholesale businesses of a wide variety, transportation companies, construction and health care companies, arts and entertainment professionals, manufacturers, educational companies, and scientific and technical services startups, among others.

Data from 2009, which documents the outcomes reported by the clients of 24 microenterprise development organizations, included firms in 18 different sectors. While many may be modest in size and ambitions, others have the potential for high growth and significant employment generation.

Also, consider the jobs the sector produces. The 2009 data indicated that, on average, for every microenterprise supported, there were 3.1 paid workers. While the majority of these jobs were part-time, they provided hourly earnings higher than minimum wage and were an important contribution to household incomes. And these jobs were sustained in 2008 as the economic and financial crises broke across the nation. In an economy that has yet to feel a full-fledged recovery, with a national unemployment rate that remains elevated, those jobs would seem invaluable to its eventual recovery.

Given that banks are still struggling to boost their commercial lending, especially for businesses that need loans under $50,000, microlenders can be the only source of funding for America's smallest businesses. As both parties continue to battle over spending and the budget, one hopes that rather than weaken the microlending sector in the short-term, they will see the return on investment the sector can produce in the long-run.