National Small Business Week is the best time to think about the near-term prospects of the Small Business Administration. It’s impossible to discuss this topic in 800 words. This column will address three external challenges facing the agency’s small business landscape. Later in the week, we will focus on three internal issues.
These aren’t the only problems the agency could solve. They are still issues that have been important during the pandemic. The SBA has the opportunity to address them.
This is not new to anyone, but it is a frustratingly persistent story about American small business ownership and entrepreneurship. This column already covered it a while back so that we won’t dwell on the subject. This chart is from a Bipartisan Policy Center report that was released in July. It highlights some of those critical discrepancies. Before COVID-19 small business owners of color were less likely to use banks in the five years preceding it. This was the reason for the rough start of the Paycheck Protection Program (PPP), which relied on pre-existing bank relationships.
The most striking demographic contrast is, however, between small businesses that have similar credit risks. Small companies with low credit risks that Black entrepreneurs own are half likely is twice as likely to be approved for all financing than white-owned companies. Equally remarkable, small businesses owned by whites are twice as likely to be approved for all funding than their Black peers, Even though they have a high/medium credit risk.
Demographics are just one dimension of a more significant problem. There are also geographic and gender dimensions. This issue is on the SBA’s radar and should remain a top priority.
One of the biggest problems for small businesses is their slow technological adoption, which can cause a drop in economic productivity. Many stories have emerged of small companies that reacted to the COVID-19 pandemic by using delivery apps and optimizing their websites. Many of these small businesses may have just started a website.
According to a Verizon Business and Morning Consult poll of 600 decision-makers and owners of small to medium-sized businesses, more people are using technology “enhance their customer experiences.” In August 2020, only 27% had done this. What upgrades are available? These were the most important.
Four out of ten stated they had “transitioned or added digital/online operations,” and 40% claimed that digital/online revenues are much or slightly higher than before COVID.
Salesforce and The Harris Poll both found similar rates in digital adoption. They conducted a global online survey of over 2,500 “SMB leaders” in July. Six percent of the respondents came from the United States. Nearly one-third (31%) had an eCommerce site during the pandemic. Eight percent had no online presence. Nearly half (46%) of respondents had implemented a “slight rise” in their online presence within the past 12 months. (These are global results.
What does digitization mean? It’s difficult to define since “digital operations” and “digital tools” now encompass many things. Respondents to the Verizon/Morning Consult poll said that 55% had used Facebook in their business during the pandemic. This is a digital tool, but it doesn’t capture all of the activities considered digitization.
Salesforce Survey results show that popular digital tools like customer service software (email marketing software), e-commerce software, or project or task collaboration tools. (Each category in the global Salesforce survey result showed a slight increase in adoption among small businesses over the past year.
These results show that there are still many opportunities for small businesses to digitize, as these findings suggest. The Census Bureau’s Small Business Pulse Survey in Phases 2 & 3 asked about online shifts. Nearly half of respondents (46%) stated that their small business uses internet platforms to sell goods and services. Only one-quarter of respondents indicated that they had increased their use of online media compared to March 2020.
Why should digitization or the adoption of digital tools be a matter that is under public control? One could argue that competitive forces should push businesses of any size to invest in productivity-enhancing tools, including the digital kind. An alternative to this is that digital adoption gaps might reflect an unevenness in the initial endowments of business owners. Access to resources–whether financial or social–determines how a business develops. A small business may lack the knowledge and understanding that digital tools can provide. This tool should be accessible to all young and small businesses.
Surging Business Creation: Trend, Temporary?
This is a big challenge for SBA. The SBA is seeing many more business start-ups than in any other period over the past 17 years. And this has been happening continuously for at least a year. SBA has been better at including small and more significant businesses in its programs over the last decade. SBA must show it can adapt to the changing landscape for small businesses with such a high rate of business creation.
Even though they may be equal in terms of employment, say 20 employees, it doesn’t mean that a small business with 20 employees and a small business with 20 employees have little in common. They should be treated equally by public policy. There has been a long-running debate about the proper business size standards. The SBA has the opportunity to become more specific in its programmatic offerings and risk assessments as well as its support efforts with the business creation bump.
This is where the SBA, along with other parts of government, will have to assess whether the 2020-21 surge represents a permanent trend and a reversal after years of stagnant growth or a temporary blip triggered by the pandemic. The SBA has the chance to address the previously mentioned financing gaps. Importantly, we know from experience that business creation can lead to gaps in accessing capital and credit, regardless of gender, race, or ethnicity. The SBA and other agencies should work together to find out how these new businesses are being funded, who started them, and the implications for public policy.