The End of Small Business in America?

Since colonial times, the United States has heavily relied on small business. An independent/family farmer is a small business. Unlike most of the world where the majority of land was held by an aristocracy and most laborers were in their employ or at their command, small, independent landholdings were a huge part of America from the beginning*

Over the past hundred and fifty years, most small independent farms have gone away or been purchased by corporate agribusiness. But as that was happening and millions of Americans were moving to cities, we became a nation of shopkeepers. Sure, millions of others became factory workers, but again millions and millions of Americans were able to have the independence of their own storefront, small manufacturing enterprise, or other entity.

This too began changing. And it wasn’t last week. A hundred years ago, small retailers already worried about the encroachment of regional and national chain stores. Some states even passed legislation to slow their advance. Over the past fifty years, behemoths like Walmart and Amazon have driven small retailers galore out of business. Even if Rona hadn’t visited us, small business was in retreat. For the past decade or so, the rate of new business starts has run below the established level. That counts all new businesses, including tech startups with a very different focus than a traditional small business. If you pull those out, the drop is more pronounced.

Instead, some of the people who would have opted for a storefront or other small enterprise in the past found work in recent years as an Uber driver or Instacart shopper. That’s a very different thing. While there is some of the freedom to set hours that comes with being self-employed, there’s limited ability to scale up to having several employees. There’s no real ability to build equity.

Other factors have tipped the scales against smaller enterprises in the past few years and decades. Steep minimum wage increases in some states and urban areas have obliterated their labor cost structure. Increased health care costs make it difficult for small employers to offer anywhere near the same benefits package that larger companies or well-funded startups do. For those enterprises requiring retail or office space, rents have become virtually impossible in expensive urban and suburban areas.

For anything that can possibly get shipped, there’s no geographic buffer. Larger companies are often more cost-efficient. Economies of scale is a real thing. For a while, if a business was in a more distant area, or a particular neighborhood, they were somewhat insulated against larger competitors who did not have a physical location near them. That cushion has evaporated. Now with many local small businesses closed while Amazon is delivering from distant warehouses, those customers who weren’t yet in the habit of going outside their area for goods have reason to start.

The current conditions are going to rapidly accelerate a process that was already in progress. Yes, Congress has appropriated over $300 billion in key assistance for small businesses. But that’s either enough to properly support 1 to 1.5 million businesses, or give a tiny amount to the 10 to 20 million enterprises who actually qualify. And even that higher level of support is only going to help close the gap for the next couple of months. It would require a return to normalcy by early summer, with no nasty recurrence of quarantine in the upcoming fall/winter.

That’s ignoring the current structural issues with distribution. Many large banks are not yet taking applications. Wells Fargo, the largest SBA lender in the country, has a cap of $10 billion in disbursements. Many banks are only willing to process applications for existing loan customers. So businesses with a current SBA loan will likely get some eventual assistance, but those who have other financing or were bootstrapping may not be able to apply before the government funds are distributed or their personal funds run out.

Even those businesses who are with the most ideal financial institution and got their request in immediately may need to wait multiple weeks to see the money. The stress is incalculable. Nor can it be easy to be an employee on furlough from or working heavily reduced hours at one of these establishments.

It’s easy to see a scenario where, even if we have a quick V shaped economic recovery, rather than the normal U shape, 10 to 20 percent of small businesses don’t survive the year, and another significant batch is severely wounded. Many surviving enterprises will do so with permanently reduced staff, higher debt loads, and less opportunity to pay out the owner(s). Where do the displaced workers and owners turn?

Not to the labor market. Many larger businesses are discovering they can operate with less staff. As it is, many will not retain all of their previous employees if/when this is all over. A chef/owner of a small restaurant can’t just immediately get hired on at another local restaurant. Especially if a few other local chef/owners are in the same position, and the surviving restaurants are forced to re-arrange their seating to make more room between tables, while some patrons are still hesitant to dine out. It’s hard enough for the surviving restaurant to keep all of their previous staff working the hours they were accustomed to, never mind hire someone new.

Unless they’re a franchisee for a major chain, small business owners don’t have the same lobbying clout that larger companies and large union members do. It’s a disparate group. There isn’t even a clear definition of what constitutes a small business. Is it less than 50 employees or less than 500? What about revenue? If you’re doing $5 million a year in volume, are you a small business? If you ask me, yes, at least unless the business is a heavily funded startup with a pile of employees. Many owner/operators are immigrants. To what extent will unemployed workers in red states worry about semi-recent immigrants who are now without their enterprise?

The nearby small business isn’t going to be the next Apple, Google, or Facebook. Those entities were small businesses for about ten seconds before rocketing in to the stratosphere. We’ll talk separately about startups in a COVID-19 world. Whether they’re poised to become world dominators or join the much larger pile of failures, it’s a completely different cost-benefit analysis for the individual startups and the nation.

So what to do about small business? If you use a larger definition, about half of the jobs in America are at one. Should assistance favor those who are employing at least 20, maybe even 50 people over sole proprietorships? Or is that ridiculous choosing of sides? Is the goal to preserve as much employment as possible or to keep as many business owners able to continue owning a business? Do we care more about those who already own a business or those who may want to in the future? Does it matter how profitable or efficient a business is? Or what industry? Or where in the country it’s located?

I don’t pretend to have any of those answers today. And I’m not sure to what extent I’m comfortable having state and federal legislatures and executive branches make those decisions. After seeing Congress come up with a pretty good SBA plan that doesn’t have enough funding, nor decent logistics for the impacted businesses to get the money, I worry that even the right plan will get spoiled. But I’m also positive that if nature takes its course, we’ll have 30-40% fewer small businesses in America a couple/few years from now, and those remaining will be weaker, on average, than they were a few months ago.

If we believe a key part of America is having a good percentage of the citizenry able to own their own enterprise and become at least a small employer, this is something that deserves intense consideration at a minimum. It impacts blue states and red, urban areas, suburban, exurban, and rural. When there’s limited opportunity to have or work for a small enterprise, we cease being the nation we recognize.

*This isn’t to ignore large southern plantations and the corresponding slavery, then followed by sharecropping, big rancheros in California, large Dutch expat landholdings in the Hudson Valley, etc. The individual destiny, small business dream has never been available to all Americans, but it has unquestionably been accessible to a larger percentage of citizens than almost anywhere else.

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