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Why the Sudden Collapse of Small Businesses?

Then as we all now know, sometime around the end of 2019 the Coronavirus pandemic began, disrupting the global economy and shuttering small businesses around the world. Very difficult, for sure, but why was this such a sudden and destructive blow to small businesses after so much progress post-2008?

Too little cash reserves and too much debt — Many businesses had not fully recovered from the 2008 financial crisis and were left with too little cash reserves and too much debt. Debt was easier to come by due to low-interest rates in the last decade and many businesses loaded up.

Commercial rents and healthcare became super expensive — We also saw commercial rents skyrocket in most markets across the country, and we failed to successfully address the healthcare crisis putting additional cost burden on small businesses.

Lack of speed to innovation — Technology and changing consumer behavior put pressure on brick and mortar businesses to invest in expensive and often complicated technology, and change their pricing and service structures to better compete with larger businesses. Many were slow to do so and lost market share as a result.

The competitive landscape now included new venture capital-backed players — Those companies used complex global financial structures to remove a need for profitability and were therefore able to deploy resources to compete in a way more traditional product and service businesses could not.

Underlying issues in the gig economy. — The gig economy had some underlying issues as well. Born in the upside of the business cycle, many gig entrepreneurs didn’t have the experience, skills, and resources to handle a normal down cycle, which was overdue by the end of 2019. And many gig workers weren’t independent contractors by choice but were a product of changing employer trends which moved away from traditional W2 engagements to more temporary 1099 contracts. The suddenness of the pandemic shift left many unable to pivot and muster the resources and connections necessary to take advantage of the government lifelines that were deployed to help small businesses, such as the Paycheck Protection Program.

If we had been looking, we could have seen this coming, but we were not. Blissfully ignorant to a minor disruptive event, let alone a pandemic, we were kicking the can down the road until we finally came to the end of it.

How do we Rebuild Small Business in America?

Recently I found myself in an awkward yet insightful position of belonging to two different WhatsApp groups. One of my groups is for my friends and colleagues that own and lead companies of at least $10M in revenue. The other is for my friends and colleagues who are mostly independent contractors and sold proprietors or own and lead companies with $2 million in revenue or less. Monitoring and engaging in the conversations in both groups and watching two very different perspectives play out has highlighted a large gap in expectations and experiences in the business community and left me with more questions than answers.

Namely, what is the solution to restore small business in America and whose responsibility is it?

Let’s start with financial institutions.

I don’t claim to have a comprehensive solution, though my experience tells me there are some places to look and some questions we must start asking. Starting with financial institutions.

We need more independent community banks to make small business banking and lending more accessible. Since the great recession the number of independent community banks has been shrinking. This was hardly noticed by the small business community until recently when business owners attempted to navigate the PPP process and found they didn’t have a personal relationship with a business banker. Millions found themselves at a critical time in the back of the line of an anonymous web portal or on hold for hours. Business owners who had relationships with smaller community based independent bankers and credit unions did much better. Not only is service more personal, independent community banks also tend to underwrite business loans with an eye toward the relationship. This is critical because most small businesses have imperfect balance sheets.

We should also expand microfinance and crowdsourcing platforms in the US. Traditional banks are held to underwriting criteria that can be impractical for start-ups and growing businesses. Venture capital does a great job of filling this funding gap in larger, predominantly tech business enterprises but smaller businesses are often left to use high interest, unsecured credit options (like credit cards) to finance growth. Microfinance is working well in emerging economies, why not expand it here? There are legal and social barriers to really get this off the ground in the US, though as we look to rebuild our economy there are opportunities for microfinance to fill the gap for small businesses at a larger scale.

What about the government and our institutions?

Let’s start by acknowledging that the solutions are not exclusively held in the public sector, or the private sector. We must work together in a new way to address universal issues. And we have an opportunity on November 3rd to speak with a united voice about what is important to us. We cannot blame politicians, we put them there. We must be incredibly studious and thoughtful about our choices and vote for politicians who will focus on rebuilding critical government infrastructure that supports small business — starting with technology, healthcare, and infrastructure.

Some things only the government can address. Healthcare and infrastructure being clear examples, though so is a lesser-known issue with the Individual Master File (IMF) at the IRS. The IMF is the mother of all files which has all of our personal and business details. The programming for that file dates back to the 1960s. How could we possibly expect something that old to turn around to support us in 2020, by, for example, rapidly sending us funds rather than collecting them?

We require institutions that are modern, efficient, and strong and that will require years of investment.

What about the SBA?

For many small business owners, the pandemic was our first experience with the SBA – and it was terrible. The SBA was created in 1953 by President Eisenhower signing the Small Business Act creating an independent agency to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.”

Millions are still waiting for funds from the Paycheck Protection Program (PPP), as well as the Economic Injury Disaster Assistance Loan program (EIDL) – 2 months since the start of this crisis. This was the opportunity for the SBA to shine, and it failed us. It’s time to reassess the SBA and determine, is it still working and relevant? If not, who is truly advocating for and providing services to small businesses in a way that matches with the needs of today?

What about employees?

The employment market has been on fire for years and many employees have never faced a downturn. Not everyone had access to great jobs of course, but the largest percentage of the working economy in history did. Now suddenly with tens of millions unemployed and a completely changed society, employees’ expectations need to change, and they need to re-skill fast. Businesses now need employees with a different orientation to rapid change and technology. Pre-pandemic we were already on this path, but it was a slow process. Now we have accelerated the evolution of our working and learning economy by at least 5, maybe 10 years in 2-3 months and the reality is that many lost jobs are not coming back. Effective immediately.

We are seeing it already. Companies are rapidly figuring out how to survive by employing fewer people in new ways. Employees need to work partnership with their employer toward an unknown future and be willing to set aside a degree of certainty that is no longer practical – anywhere. Employers will be increasingly looking to their employees to provide solutions, in addition to new efficiencies and capacity. My hope is this will engender a new sense of loyalty – from both sides and I also hope this starts a new era of training and education based in practical skill sets.

In the next and final part of this series, I’ll be covering one of the most overlooked issues in the world of business today: the disparities.

As conversations of race and equity have moved to the forefront of public discourse, the issues of inclusion and representation are especially relevant today.

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