Celebration of National Small Business Week provides a good opportunity to consider, at least in brief, the near-term future of the Small Business Administration (SBA). Justice can’t be done to that topic in 800 words, of course. So, this column will highlight three external challenges on the small business landscape facing the agency. A column later in the week will look at three internal challenges.
These aren’t the only challenges the agency could address nor are they necessarily the largest. But they are issues that have been prominent during the pandemic and offer opportunities for the SBA to engage.
This is not news to anyone, but it continues to be one of the frustratingly persistent narratives around American small business and entrepreneurship. This column covered it not long ago so won’t dwell on it here. The nearby chart, from a Bipartisan Policy Center report this past July, highlights some of those key disparities. In the five years prior to COVID-19, Black-owned small businesses were the least likely to use a bank. That contributed to the initial unevenness in the Paycheck Protection Program (PPP), which relied on pre-existing banking relationships.
The most striking demographic comparison by far, however, is between small businesses of similar credit risk. Black-owned small businesses that are low credit risks are half as likely as white-owned firms to receive all the financing they seek. Equally astonishing, white-owned small businesses are twice as likely as their Black peers to receive all financing sought even when they are a medium/high credit risk.
Demographics are only one dimension of the broader problem. There are gender and geographic dimensions, too. This challenge is most definitely on SBA’s radar and should continue to be a top priority.
One traditional knock on small businesses has been that they lag in technological adoption and thus drag down overall economic productivity. There have been plenty of stories of small businesses pivoting during the COVID-19 pandemic and utilizing delivery apps and enhancing their websites. Many may even have built a website for the first time.
According to a recent Verizon Business and Morning Consult survey of around 600 “small to midsize business owners and decision makers,” more are using technology to “enhance customer experiences.” Over half of respondents (52%) had upgraded their use of digital tools—in August 2020, just 27% had done so. What type of upgrades? Cybersecurity, employee connectivity, and secure cloud backup were the main ones.
Four in ten said they had “added or transitioned to digital/online operations” and 40% also said their revenue generated through digital or online operations is much or somewhat higher than pre-COVID.
Similar rates of digital adoption were found by Salesforce, together with The Harris Poll, in a global online survey in July of over 2,500 “SMB owners and leaders.” (Six percent of respondents were from the United States.) Close to one-third (31%) of respondents had added an e-commerce presence during the pandemic, although eight percent said they had no online presence at all. Nearly half (46%) implemented a “slight increase” in their online presence over the prior 12 months. (These are global results, remember.)
What does digitization mean, exactly? It’s not entirely clear, as “digital tools” and “online operations” now include a wide variety of things. In the Verizon/Morning Consult survey, 55% of respondents said their business had either started or increased their usage of Facebook during the pandemic. That’s definitely a digital tool, but doesn’t necessarily capture the universe of activities that might count as digitization.
The Salesforce survey results point to digital tools such as customer service software, email marketing software, e-commerce software, project or task collaboration tools, and marketing automation. (Each of those categories, in their global survey results, saw small increases in adoption among small businesses over the past year.)
As these findings indicate, there is still ample scope for digitization among small businesses. The Census Bureau’s Small Business Pulse Survey, in Phases 2 and 3, asked about online shifts. In early 2021, the last reading for this question, nearly half of respondents (46%) said their small business “does not use online platforms to offer goods and services” (emphasis added). Just one quarter said that, compared to March 2020, they had increased their use of online platforms.
Why should digitization or digital tool adoption be a matter of public policy concern? One could argue that competitive forces should push businesses of any size to invest in productivity-enhancing tools, including the digital kind. If they don’t do so and can’t compete, well then that’s how dynamism works. A counter to that might be that digital adoption gaps reflect unevenness in the initial endowments among business owners. Lack of access to resources—whether financing or social networks—shapes the trajectory of business from its beginning. There are, for example, gaps in knowledge and understanding of what digital tools can offer a small business. All small and young companies should have the opportunity to prove their mettle with these tools.
Surging Business Creation: Trend or Temporary?
This phenomenon is a good challenge for the SBA. Many more businesses are coming into existence now than at any comparable point in the last 17 years—and that’s been continuously true now for a year. Over the last decade, the SBA has done a better job of being more inclusive in its rhetoric and programs of both young small companies and older, more established small businesses. With such a surge in business creation, SBA will need to show that it can be responsive to a changing landscape of small business.
Just because they’re the same in employment size—say, 20 employees—doesn’t mean a two-year-old small business and a 20-year-old small business have much in common and should be treated indistinguishably by public policy. There is, of course, a long-running debate over proper business size standards and what the thresholds ought to be. The business creation bump offers the SBA a chance to be more fine-grained in its programmatic offerings, its risk assessments, and its support efforts.
Here, the SBA and others parts of the government will need to determine whether or not the 2020-21 surge is a permanent trend—and thus a reversal of years of stagnant business creation—or a temporary blip caused by the pandemic. One opportunity it does afford is to address the financing disparities noted above. Importantly, we know that gaps in access to capital and credit—across gender, race, and ethnicity—open up at the very moment of business creation. SBA, together with other agencies, should be seeking to determine how all these new businesses are financing themselves, who’s starting them, and what that means for public policy.