“Without strong federal action, as many as 2 million small businesses in the U.S. will permanently close as a result of COVID-19,” said Marie Johns, one of the report’s co-authors and the former Deputy Administrator of the U.S. Small Business Administration. “This would devastate our economy, contribute to elevated unemployment, and destroy the fabric of the country’s towns and urban neighborhoods. We need federal leaders to think big.”
Small businesses currently sit at the intersection of three colliding forces: the COVID-19 recession, long-term economic consolidation, and deep racial inequalities.
Since COVID-19 hit in February, almost 25% of all U.S. 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.
Since the late 1990s, more than two-thirds of all U.S. industries have grown more consolidated, from dog food to airline travel. Even more strikingly, the rate of business creation has fallen by half since the 1970s.
And as the COVID crisis has made abundantly clear, there is deep racial inequality in our country that affects the physical and financial health of entrepreneurs of color. While Black Americans are 12.3% of the U.S. population, they own just 2% of U.S. small businesses. Latinx Americans are similarly underrepresented. Because minority businesses operate with less capital, they are also more likely to fold under pressure. COVID-19 is a case in point. The Federal Reserve of New York reported that from February to April the number of Black businesses declined by 41%.
Responding to these three forces, the report lays out five steps policymakers can take to help the small business sector survive:
- Forcefully respond to the COVID-19 crisis by providing grant and loan programs that are appropriately scoped.
- Unleash America’s entrepreneurial spirit by reducing barriers to entry, giving disadvantaged entrepreneurs the tools they need to succeed, and strengthening antitrust laws and enforcement.
- Build a financial system that works for Main Street by launching a new generation of federally-backed debt and equity products, and by strengthening community banks and nonprofit financial institutions.
- Harness the power of public and private procurement to help build wealth in minority communities.
- Require the federal government to collect more and better data on the small business sector and to more rigorously evaluate programs for continuous improvement.
These five steps are further broken down into 10 policy recommendations and dozens of specific proposals.
“When I co-led the transition for the U.S. Housing and Urban Development Department in 2009, I saw first-hand the unique opportunity to advance big ideas during the first months of a new presidency,” said Bruce Katz, co-author, Director of the Drexel University Nowak Metro Finance Lab, and former HUD Chief of Staff. “That’s why we lay out a bold vision for the future of federal small business policy.”
The report includes a comprehensive review of federal small business policy and an analysis of small business capital markets. It focuses in particular on the challenges that low-income entrepreneurs and entrepreneurs of color face in accessing capital to launch and grow businesses and tailors policy recommendations to address these barriers.
“Black and Latino-owned businesses have borne the brunt of the COVID recession,” said Luz Urrutia, CEO of Opportunity Fund, the nation’s leading nonprofit Community Development Financial Institution small business lender. “Entrepreneurship is second only to homeownership as a means of building wealth. We have an opportunity to build back something better than we had before by accelerating investments in entrepreneurs of color. We should take it.”
The report advances a number of novel policy ideas, including:
- A federally-backed, first loss guarantee loan 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; and
- A new federal Small Business Ecosystem Demonstration Project to catalyze and evaluate ways of driving transformative small-business outcomes at the metropolitan level.
“New technologies and business practices have opened new avenues for the federal government and the private sector to support small businesses,” said Nate Loewentheil, Vice President at Camber Creek. “By creating a new generation of federally-backed loan products in partnership with technology companies, and with appropriate safeguards, we can meet entrepreneurs where they are – online and on their smartphones,” noted Jamie Rubin, CEO of Meridiam NA.
“The racial wealth divide is a serious and ongoing problem in our country and can only be addressed if we give minority-owned small businesses the tools to succeed,” added Gary Cunningham, President & CEO, Prosperity Now, “We know that the median net worth of Black business owners is 12 times higher than Black non-business owners and yet during the pandemic the number of Black owned businesses have declined by more than 40 percent.”
The full report as well as an executive summary and briefing deck are available at www.bigideasforsmallbusiness.org. This report is part of the Institution for Social and Policy Studies (ISPS) Working Papers Series and was published jointly with the Drexel University Nowak Metro Finance Lab at the Lindy Institute for Urban Innovation. The perspectives expressed in the report are those of the authors alone and do not reflect the views of either institution.
SOURCE Drexel University Nowak Metro Finance Lab