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The US reported a 13.3% unemployment rate in May, — the worst since WWII. This is despite pumping trillions of dollars into the economy designed to save small businesses and jobs. Twelve years of difficult work recovering from the great recession, gone in only two months. We have no reference for such an immediate and sudden collapse, and perhaps equally disturbing as that lack of historical precedence is that so many business owners find themselves in despair so quickly.
According to a study by researchers at the University of Illinois, Harvard Business School, Harvard University and the University of Chicago, more than 100,000 small businesses have already permanently shut. Two percent of small businesses have gone out of business in a survey conducted from May 9th through May 11th. Restaurants are worse with 3% already gone according to the National Restaurant Association, and OpenTable is now saying 25% of closed restaurants won’t survive.
While the pandemic situation is certainly extreme, it remains puzzling and disturbing that despite what appeared to be a great recovery post great recession, millions of small businesses are failing so quickly. The pandemic is exposing a remarkably limited capacity to sustain ourselves, and the consequence — untold millions of Americans are falling into economic despair.
How were we so badly prepared on the heels of what appeared to be a very robust economy?
The Dangerous Lack of Cash Reserves
We actually knew this could happen. Just this last April, the Federal Reserve Bank of New York released a Small Business Credit Survey that had been in the works for months that said 17% of small businesses (broadly defined as less than 500 employees) would have to close down or sell if they experienced a two-month loss in revenue. That survey did not take into account the loss of all revenue for 2 months, which has been the case for millions.
Businesses were operating month to month — just like 4 out of 5 Americans who were living paycheck to paycheck. Small businesses had very little runway to handle a minor disruptive event — let alone a pandemic, and the data points to a hidden truth; small business enterprises in America weren’t actually working for the entrepreneur or for the worker. We were standing on the precipice of disaster and all we needed was a little shove.
How did we get here? And importantly, what do we do about it?
A Short American Small Business History Lesson
Some of the earliest small businesses in America can be traced back to the 1600s when Americans traded crops, supplies, and services with each other. All businesses were small back then — in part because modern machinery and automation were not yet available, transportation was basic, and financial mechanisms (like banks, loans, taxes) were rudimentary.
After the revolutionary war our nation became more independent and resourceful and small businesses began to boom. More products and services were available in more places and more people had the means to participate in the economy. Credit was established with individual business owners evening out weather-driven ups and downs in commerce.
As we entered the 20th century and the 2nd industrial revolution, businesses grew larger and we began to draw a distinction between local small businesses and bigger regional businesses. Bigger businesses flourished with the assistance of new technology, and an expanded geographic footprint. Small businesses did too as they understood local buying trends and opportunities better than the larger businesses.
Two world wars and many other challenges later we entered a new era of strength for small business in the 1960s and 1970s as bigger businesses wrestled with dynamics of globalism, finding it difficult to compete with a growing set of foreign competitors, which helped small businesses flourish. By the 1980s a modern-day form of “entrepreneurship” was born as more people wanted freedom to chart their own path and in the 1980s and 1990s small businesses employed more than half the American workforce.
The 21st Century and Industry 4.0 Period
We entered the 21st century with great optimism but began an era of decline for small businesses. Industry 4.0, characterized as the internet era, changed the competitive landscape, accelerated customer preference changes, and brought international capital markets to community-based business networks — leaving a lot of “mom and pop” businesses unable to compete with those who changed faster and accessed scalable capital.
Queue the great recession and between December 2008 and December 2010 about 1.8 million small businesses went under. That helped accelerate opportunities for larger, better capitalized businesses who were able to increase market share by simply staying in business and using cheap government supported borrowing mechanisms. With better capitalization they acquired weaker smaller companies, further eroding the local small business landscape through consolidation.
Post Great Recession Period
The decade after the great recession seemed to promise better economic conditions for small businesses. Local entrepreneurism saw a resurgence as the internet leveled the playing field of information and resource access. New financial instruments, such as merchant cash advances and equipment financing, were created to help small businesses grow. The SBA also expanded its lending program during this time.
Plus, it was sexy to be an entrepreneur again. Born in part out of a backlash against real or perceived big business grievances and a new awareness of climate impact, “buy local” initiatives gained momentum, which helped strengthen small businesses.
The modern-day gig economy was also created as people sought freedom from their desk jobs, or because they ran out of other options and by 2019, the US Bureau of Labor estimated that as many as 9.6% of workers were independent contractors — millions more than prior to the great recession.
Then a pandemic broke out…
In the next article of this three part series, I’m going to be discussing how in just a few months, the coronavirus has upended entrepreneurship as we knew it.
I’ll be covering the underlying issues in the new economic landscape, how the government factors in, and how we can rebuild small business.