We must collectively commit to rebuilding the small business sector

Small businesses in America are in crisis. The COVID-19 pandemic has created the greatest economic shock since the Great Depression, and it is landing hardest on our nation’s new and small businesses, the heart of local economies and community life.

The pandemic has reminded Americans of the outsized role small businesses play in our economy, employing 47% of the United States workforce, generating two-thirds of new jobs, and serving as a critical path to economic self-sufficiency. Yet, it has also revealed the fragility of many of these enterprises and the profound deficiencies in how they are supported by federal policies, private practice, and local action.

With Congress at an impasse on a new stimulus package and permanent business closures rising by the day, I, along with several of my peers, have prepared Big Ideas for Small Business, a five-step roadmap toward a more inclusive, dynamic, and productive small business sector.

The authors of this report come from different backgrounds. We work in venture capital, finance, law, economic development, and politics. We are Black, Latino, Asian, and white. We hail from both coasts and states in-between. We are united by three simple ideas: Small business matters; there is more we can do to support them; and this is the time to act.

Released last week by the Nowak Metro Finance Lab at Drexel University and Yale University’s Institution for Social and Policy Studies, the report finds that the small business sector lies at the crossroads of four powerful forces: the devastation of COVID-19, a national reckoning with deep racial inequity, a long-term trend of economic consolidation, and a degraded federal government.

The scale of the problem

The numbers are stark.

First, the COVID-19 crisis is wreaking havoc on Main Street small businesses across the U.S. Since February, almost 25% of all small businesses have closed at least temporarily. In the hardest hit sectors, like restaurants, hotels, and retail, the numbers are far higher. In September, Yelp reported that for businesses on its platform, 60% of closures were permanent. Those closures have left millions of Americans out of work, transformed lively neighborhoods around the country into retail graveyards, and destroyed the wealth built by many families over generations.

Second, the impact on Black- and Latino-owned businesses has been catastrophic. The most recent set of federal data, for example, revealed disturbing trends for Black-owned small business. While Black Americans are 12.3% of the U.S. population and the share of Black entrepreneurs has steadily increased in the past two decades, they own only 2% of U.S. small businesses. The share of new entrepreneurs for Latino Americans more than doubled from 1996 to 2019, yet they are similarly underrepresented. Because these firms are smaller, operate with less capital, and have less established banking relationships, they are also more likely to fold under economic pressure. The Federal Reserve of New York reported that from February to April the number of active Black businesses declined by 41%.

Third, the economic crisis brought on by the pandemic is accelerating the trend toward consolidation in the economy. Since the late 1990s, more than two-thirds of all U.S. industries have grown more consolidated, from dog food to airline travel. At the same time, small business creation has declined since the mid-2000s, whether measured by the absolute number of new businesses, per capita rates of business formation, or per capita small business job creation. Between 2005 and 2015, for example, the number of small retailers declined by more than 20%. The pandemic has boosted not only the market share of e-commerce giants such as Amazon but also cemented the dominance of Dollar Stores and other publicly traded corporations in vulnerable communities.

Finally, the pandemic exposed the fault lines that run beneath the federal government’s small business programs and agencies. Prior to the onset of COVID-19, the typical annual federal budget for small business programs was under $4 billion, approximately as much as the U.S. Navy spends on a single attack submarine. Limited in its scope, authorities, reach, and human resources, the U.S. Small Business Administration (SBA) could not meet the exigencies of the COVID-19 pandemic. The launch of the Paycheck Protection Program (PPP) was marred by widespread miscommunication and confusion. Roughly 4 million small businesses took out loans without any clarity on whether the loans would be forgiven or not. The failure to enact any subsequent relief products this fall is an act of federal malpractice.

Recommendations to rebuild the small business sector

The collision of these four powerful forces creates both the necessity for and the political conditions that enable a broad rethinking of how our country supports small businesses. Led by the federal government, we must collectively commit to rebuilding the small business sector.

To get there, the report outlines five steps:

• Address the COVID-19 crisis in the small business sector.
• Level the playing field for entrepreneurs.
• Build a financial sector that actually works for small businesses.
• Use public and private procurement to grow minority- and women-owned firms.
• Collect the data to understand, evaluate, and improve public programs and policies at the local, state and federal level.

The five steps are broken down into 10 major policy recommendations, and under each are detailed policy proposals. Many of the proposals within these recommendations advocate for bills currently making their way through Congress, while others build on existing programs, like the State Small Business Credit Initiative (SSBCI). The report also advances a number of novel ideas, including:

• A federally backed, first loan-loss guarantee program for fintech lenders that operates at the portfolio level to enable disadvantaged entrepreneurs to access right-sized, federally subsidized loans without the onerous paperwork required under current law.
• The development of a private sector Environmental, Social and Governance (ESG) standard for procurement from disadvantaged business owners, around which the private sector could mobilize to bring the benefits of contracting set-asides to a broader market.
• A new federal Small Business Ecosystem Demonstration Project to catalyze and evaluate ways of driving transformative small-business outcomes at the metropolitan level.

A response that matches the scale and reach of the crisis

Many of the proposals are also built, not surprisingly, on Kauffman research and initiatives. Access to Capital for Entrepreneurs: Removing Barriers, a signature 2019 report, informed recommendations for a broader array of financial products focused on equity investments rather than just debt lending that are more fit to purpose of Black- and Latino-owned businesses. America’s New Business Plan similarly provides commonsense solutions to ensure that entrepreneurs have the access to the services and support they need to succeed.

The Big Ideas for Small Businesses report estimates that, over 10 years, the actions laid out in the roadmap would generate a net new 1.5 million small businesses above pre-COVID levels, triple the number of small businesses owned by Black and Latino Americans, grow small businesses’ share of U.S. employment by 25%, while contributing to a more competitive, dynamic, and innovative economy.

Without major federal interventions, whole swathes of the small business sector will never return, and entrepreneurship levels could remain depressed for a generation, if not longer. The impact on individual businesses and the communities they serve will be incalculable.

But this is not just a task for the federal government. As the response to the COVID-19 crisis has revealed, the reach and impact of federal investments are maximized when they engage the full range of institutions that serve small businesses and match them to the services, customers and capital they need to succeed. These institutions include traditional banks but also state and local governments, business chambers, incubators and accelerators, philanthropies, universities, community financial institutions, micro-lenders, and others.

The COVID-19 pandemic is precipitating a small business recession that is unprecedented in U.S. history. Our response, federal and local, public and private, must match the scale and reach of the crisis.

Uncommon Voices columns bring new perspectives and opinions on topics related to the Kauffman Foundation’s work. The perspectives of the authors do not necessarily reflect the views of the Kauffman Foundation, but are presented here to celebrate uncommon voices and civil discourse to move conversations forward. If you have an idea for a column, please read the guidelines for contributors.