If They Haven’t Already, Local and State Econ Development Should Diversify Focus to Emphasize SMBs and Entrepreneurs

by Frank Gibson, CEO and Interim Chairman of the Board of the North-Central Ohio Employer-Based Worker Training Partnership, Workforce Development Advisor, retired from The Ohio State University – Alber Enterprise Center

Everyone seems to be scrambling to be part of the Artificial Intelligence marketing pandemonium. Trillions of dollars are being invested worldwide to solidify AI’s place in the center of all activity. Whether it will succeed in securing that place, or significantly near that level, is heavily debated. Nevertheless, the continuing concentration of bank and investment capital away from community banking not only places all eggs in fewer baskets, it makes it harder for Small and Medium-Sized Business (SMBs) and entrepreneurs to get a chance to reach their full potential and to provide local jobs that will sustain the local economy, should the AI boom fizzle or the bubble burst.

Cities and states are beginning to experience revolts to AI data centers popping up in backyards with very little notice to residents affected, regulation or buy-in – underestimating or ignoring concerns for their enormous thirst for water and energy, their potential for air, water and noise pollution, or what that means for the community if the AI bubble pops and the building and property are abandoned.

People in the upper-mid west and northeast are familiar with the “job creating” promises made throughout the last few decades, and the aftermath of decaying properties, buildings and workers left behind by a shift in investment interest. Legacy industries were first disrupted – steel, then textiles, then electronics, then automotive. As for the promised replacement to these employers, many new US projects did not make it to expectations. The mass relocation of manufacturers during the multi-decade off-shoring wave, as the US became an incubator of SMBs headed south, north and overseas, was more “destructive” than “creative.” Overnight communities lost their biggest employer(s) and premier contributor to the local tax base. Cumulatively, communities veered from boom to bust, setting aside their horrifying experience to rely, once again, on the next “promise of opportunity.”

A few years ago, the reshoring of microchip factories with the help of the CHIPs Act of 2022, promised a surge in jobs and prosperity for communities that fought hard enough to bring the jobs to their area. Just like electric vehicle and solar production, to date most projects have scaled back their efforts, toned down their projections of job creation, or shifted their focus and therefore their timeline to job creation – with some projects stopped altogether. With a new administration came a shift in priorities and players. Global tensions, tariff policies and supply chain disruptions are still changing plans, sometimes overnight. With AI data centers and the ever-more-consuming amount of money poured into projects is unhindered, we can expect a short-term rise in construction jobs and supplier jobs. But AI’s widely advertised purpose is not the creation of jobs instead the actual elimination of jobs, so we might see a “wash.” It seems counterintuitive to use taxpayers’ money to enable an industry, with access to its own capital, that promotes the destruction of taxpayer’s livelihood, lifestyle and community. As we witness daily, trading long-term stability and steady growth for the short-term booms has never worked out well for the current and next generations.

Local SMBs and entrepreneurs have been waiting their turn to be showered with support and affection like those that capture and hold the media’s and capital market’s attention. In many cases they are “boot-strapping” their business longer than ever expected. Instead of being sincerely celebrated, nurtured and supported they are often viewed with indifference, skepticism or as “riddled with risk.” Never mind that many of the large, established and enduring corporations were started on a kitchen table or in a garage, or that some mega giants that simply emerged are notoriously risky. No matter what the latest economic shift or upheaval is created by others, experienced SMBs and entrepreneurs who have been around these blocks a few times have been able to survive while other more well-financed and visible companies surge then evaporate.

Since the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994, banks have moved their investment capital to areas where they could make more profits. Small business development doesn’t return profits as high and fast as a few nights of arbitrage investing. When a local or state economy dries up, these banks will move their savings deposits to investments where the economy is hotter. This movement can even cause the local economy left behind to dwindle.

Before the early 1990’s, local officials and economic development leaders could use their combined influence to lean on lenders to partner on local projects for a thriving community, which the local bank saw as potentially boosting their deposits reasonably enough for the times. Since 1994, the availability of community banking for SMBs and especially entrepreneurs has dwindled except for a few familiar enterprises with real estate to back the loan or sufficient personal liquid collateral – which most entrepreneurs burn through in the first months developing and proving their concept, and opening the door. With the Riegle-Neal Act combined with the repeal in 1999 of the Glass-Steagall Banking Act of 1933 (which, after the Crash of 1929, restricted banks from using depositor money for speculative investments), the sources of conventional banking for SMBs and entrepreneurs has been limited to personal home equity lines of credit, “loan sharking” levels of interest on invoice factoring and increasingly high interest personal credit cards. By the way, many credit the repeal of the Glass-Stegall act, which induced heavy speculation into the financial and housing markets, with leading to the Crash of 2008 – 8 years after signing – devastating SMBs and entrepreneurs who were boot-strapping and thought they were insulated from that activity, in the process.

Entrepreneurs who cannot find investors and turn to conventional financing tend to make the requests to a bank small, fearful of overleveraging themselves. But not asking for quite enough can add to their challenges later if they have to go back for more if  successful more than anticipated. Banks make it even harder by making collateral requirements beyond reasonable. One would get the impression the banks make the terms so onerous that the borrower pulls the loan request, foregoing a “bank rejection” which would add to national data that would document a trend.

A primary reason, other than profit potential, cited by banks for not wanting to consider an SMB or entrepreneur for lending is because the size of deals have changed so drastically in the last few decades. With large business loans and even large business start-ups in the multi-millions and billions, even a $500,000 loan looks like “too much time on paperwork to be worth the effort.”

Now with the concentration of capital in the AI boom or a future trip to Mars, whether it will lead to success or not, finance options for SMBs and entrepreneurs have disappeared almost entirely and the last resort “angel investors” – if they can be found – are either sitting on the sidelines or dabbling in cryptocurrencies, commodities or prediction markets. Innovative ideas are always seen as risky since they usually plow new ground, but serious entrepreneurs are pretty meticulous at vetting their concept as they use up their limited personal resources to make the point.

The Small Business Administration has made it difficult for an entrepreneur (and some SMBs whose product or service is not familiar to everyone) to interest a bank. For many decades, banks that process SBA loans (for most SBA 7(a) loans, the SBA guarantees up to 85% for loans of $150,000 or less and 75% for loans over $150,000.) have concentrated in booming urban areas and are hard to find in the local community. Until recently, the SBA guaranteed “larger” companies and large faith-based organizations up to 500 employees. While the SBA says to be refocusing on more smaller businesses and farms, one would still have to find a bank or lender that makes SBA loans. And when you do, it is the lender, with all of its biases against products and services they don’t understand, or find uninteresting, using accounting metrics more suitable for thriving companies that could make it without lending, and with their corporate financial investing focus that makes the decisions.

According to the SBA’s 2025 Annual Report, the SBA provided “$16.8 billion dollars in loan guarantees for 43,000 small businesses with 5 employees or less.” That is an average loan size of around $390,977. Where these loans were made and to whom isn’t publicized in the report, but is seems a stretch that a small businesses with 5 employees in my neighborhood could qualify for that size of loan without $600,000 in an account in the lending bank as collateral!

Small Business Investment Companies (SBIC) receive their funds though the SBA and follow their lead, and many often use that funding to drive an investment strategy that has more focus on their return than the businesses they are investing in. SMBs and entrepreneurs can spend a lot of time locating an interested SBIC, or venture capitalist, without success. Many give up on looking and focus on the more predictable, but more difficult, boot-strapping

The SBA hasn’t been enforcing the prime government contractor “set-aside” requirements for decades, which were created to nurture budding vendors and suppliers, which could have helped diversify local economies. Instead, prime contractors have kept most of the contract or subcontract with a company that meets the requirements but is owned directly or indirectly by the prime itself. As private equity investors have acquired more and more SMB firms, it makes this type of circumvention even more possible.

Bottom line, as banks became more consolidated they lost interest in servicing this end of the spectrum. Private equity and hedge fund mergers & acquisitions has concentrated so many small and medium manufacturers into larger “conglomerates,” that local manufacturers feel left out when contracts seem to stay “In-house” or overseas for a cheaper cost. What has been lost is the sense of community altruism that drove American businesses and progress for decades, sometimes against fierce private interest opposition but forward nonetheless.

State and local economic development efforts should include, if they don’t already, an emphasized focus on small and medium business (SMBs) and visionary entrepreneurs. Not just as a talking point, but a deliberate effort. As stated, the detrimental affects of concentrating capital on both coasts – Silicon Valley and New York’s Wall Street – is that it drains the availability of seed, start-up and stage 1 investment and lending for local projects that would create local, sustainable jobs, support families that spend their money in the local economy (which creates more jobs), and stabilizes a tax base for local government spending on infrastructure and services. The sad irony is that if an SMB or entrepreneur makes it big in spite of community neglect and navigated economic disruptions not of their doing, banks are there urging them to buy the bank’s financial products or place their money in a bank’s savings account so the bank can invest it themselves elsewhere.

While a large project might promise (with very little obligation) thousands of good paying jobs in exchange for mega government grants, tax abatements, and tax-payer upgraded infrastructure and environmental waivers, a number of them do not meet their projections and many of them fail completely. Another state might even try to lure them away when incentives start to dry up. On the other hand, making a small amount of grants, investment capital and lending availability to aspiring business moguls and providing ongoing support and services to help with their expansion, provides outcomes that are more predictable, manageable and sustainable.

For example:

$200,000,000 in local and state support for one large project that proposes to create 2,000 jobs at an average of $45,000/yr wage per job. = $100,000/job to create, requiring 2.2 years to break-even on the job creation, gross income side…if the project materializes as advertised and doesn’t fail with the next Wall Street redirection. In that event, some or all of the massive state and local investment may be unrecoverable. On the pro side, there may be a short-term surge in local tax base increase, but that is after the cost of the other enticements are absorbed.

$2,000,000 in local and state support for 20 SMB and entrepreneurial projects that propose to create 100 total jobs at an average of $45,000/yr wage per job. = $20,000/job to create, a 2.25 return on job creation, gross income side in the first year. Multiply this doable strategy by 20 communities and you’ve matched the 2,000 job creation goal of the $200,000,000 investment…for only $40,000,000.

SMBs and entrepreneurs aren’t looking for a handout, they just want what the big boys have: access to capital and financing.

• they rarely need government infrastructure improvements unless expanding,
• projected outcomes are more manageable and achievable,
• the wages are almost all spent locally along with some profits reinvested locally to hire more or contract for other available support services, fueling the success of other local businesses.
• these jobs increase a stable flow of money to safety net programs such as Social Security, Medicare, Medicaid and Unemployment.
• these employers are more likely to stay in the community.
  • a few may even become extremely successful and expand way beyond the original project’s expectations, which will require local support to secure the growth to the benefit of all.
  • if successful, an SMB and Entrepreneur investment program can be scaled, whereas 1 large project usually starts at the peak scale, with no place to go but down if unsuccessful.

True, both projects have “multiplier effects” that are only briefly mentioned in this article, but no one can deny that profits from large projects are returned to the investors on the coasts or in other countries.

In the case of the latter, the risk is much less with appropriate vetting and worth setting aside the stereotypes cultivated over the decades to justify ignoring their potential. SMBs should not be judged as “credit or investment unworthy” based on having liquidated their assets to fund their pursuit of their dream or for what they endured to develop their own idea for prime time. Their value is in their future potential and how close they are to realizing it. Losing even the entire $2,000,000 because of an economic disruption is a fraction of a fraction of what is lost when a large project fails to deliver or fails entirely. What’s that warning about putting “all eggs in one basket?”

According to a recent article in Better Markets Substack by  Evan LeFlore, Director of AI, Innovation, and Economic Opportunity, “ Soon, an AI system you’ll never see and can’t question will decide whether you get a loan, what your interest rate is, whether your insurance claim is paid, and whether your job still exists. That’s not a forecast about 2035. It’s happening now, in finance, retail, logistics, and the office jobs that have long been a path into the middle class. The decisions are being made faster, at greater scale, and with less transparency than anything that came before, and the people most affected by them have the least say in how they’re made.” Remembering entrepreneurs are just normal consumers first, this AI dominance may drive entrepreneurism to disappear entirely as the barriers become insurmountable. An entrepreneur’s focus would have to turn to self-preservation for themselves and family, rather than pursuing what could be a dream of genius that would improve the lives of many. Then we can only hope the remaining SMBs – the ones not gobbled up by private equity and hedge funds and closed or moved elsewhere – are enough to sustain a community

The number of new business startups per capita in the U.S. fell by nearly half between 1978 and 2012 and has only partially recovered since. People rarely talk about entrepreneurs anymore, like you barely hear a bank advertising “loans for small businesses.” It will take a while to regain the trust of SMBs and entrepreneurs, but an honest effort will be catalytic.

All of the components to make the shift are in place, it just takes the political encouragement to make the case of why the shift to hedging is a better, safer and more productive use of taxpayer dollars. With a strategic community banking and local investments parallel effort, cultivating local businesses for local jobs isn’t far out of reach. If one SMB or entrepreneur fails, another can quickly take its place with a diligent recruitment effort. Diversification of the employer-base makes sense. With closer working relationships and greater access to resources, many failures can be avoided.

Sure, it is definitely sexier and career-building for those advocating for large projects, and no one will change that without a massive scandal drawing voter ire. But larger companies seem to have no problem accessing capital and financing of any kind. Economic development efforts could be diversified to hedge their bets by including a serious, planned effort to search for, cultivate and support SMBs and entrepreneurs. Let’s remember what worked when generations of communities were happy, stable, vibrant and thriving; before we were convinced that our role was to help millionaires become billionaires, and billionaires to become trillionaires. When we thought if workers helped the few build wealth it would lead proportionally to the building of wealth and prosperity for those who helped make it happen.  In 2025, the top 1% now own 32% of the wealth, an estimated $52 trillion.

Maybe its time to help and support some innovative thousandaires to become millionaires, who might have no chance or inclination of forgetting who helped get them there. As a side-note, I find it telling that the definitions I found for “thousandaire” listed the word as “humorous.”

 

Contact Frank Gibson at the North-Central Ohio Employer-Based Worker Training Partnership website.