People tend to think of America as a country of big corporations — and at one time, it was. Today, however, small businesses are the beating heart of life in the United States.
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“Small businesses are the engine of economic growth in America,” said economist Peter C. Earle, Research Fellow at the American Institute for Economic Research. “In the 1950s, people used to say ‘as goes General Motors, so goes the United States.’ Today, and certainly for the past three or four decades, one could say ‘as goes small business growth, so grows the United States.’ It is difficult to understate the importance of facilitating the formation and growth of small firms within the U.S. economy.”
But in 2020, America’s small businesses — its mom-and-pop stores, its sole proprietors, its single-employee shops, its restaurants, bars and bakeries — were put to a test unlike any experienced by any generation that came before. For many, it took COVID-19 to recognize just how critical America’s small businesses are and just how bad things can get when they fail.
America Is Only as Strong as Its Small Businesses
In the modern era, almost all American businesses are small.
“Small and family-owned businesses are the backbone of our national and local economies,” said Cindy Donaldson, CEO of business consulting and coaching firm Red Barn Consulting. “Ninety percent of businesses in the U.S. are family-owned. Almost 50% of the employed people in the U.S. work for small businesses.”
The Small Business Administration backs up Donaldson’s claims. SBA states that America’s 30.7 million small businesses provide nearly 60 million jobs. That’s 47.3% of the U.S. workforce. An incredible 99.9% of all businesses in the United States are small businesses.
Their importance goes beyond just jobs and economic productivity, though. When small businesses close, the consumer is robbed of an alternative to the generic big-box chains and they lose a slice of their local culture and community character.
“When these entrepreneurs are denied support to survive in a tough economy, we run the risk of becoming more dependent on the influence of big brands on consumer options,” said Michael Hammelburger, CEO of business consulting firm The Bottom Line Group. “Having small businesses compete against large enterprises provides us with more choices and a prospect for discovering the next disruptors that will bring the needed innovation in the marketplace.”
Running a Business Is Hard, Risky and Uncertain
There’s a common misconception that business owners have it made. With no boss, you can just close up shop and take a day off whenever you like.
A cute thought, but one that’s a far cry from the reality experienced by most small-business owners, whose day-to-day grinds involve long hours, ever-present money stress and a tangled web of confusing and expensive taxes and regulations.
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“The success rate of a small firm in America is quite low over time,” Earle said. “Something on the order of 5-10% are still in business after five years.”
For Many Businesses, COVID-19 Was Simply Not Survivable
Eventually, survival comes down to cash.
In 2020, the National Academy of Sciences of the United States of America published research that showed just how fragile most American small businesses are — and that was before the economic bloodbath of COVID-19. The median business with more than $10,000 in monthly expenses went into the COVID-19 crisis with just two weeks’ worth of cash on hand. Three out of four businesses had enough cash to last only two months or less.
That’s a precarious situation even without a once-in-a-century crisis. When the virus hit, the results were predictable to anyone who understood just how tenuous the average small-business owner’s position was. By September, nearly 100,000 businesses that had shut down temporarily were now closed for good, according to Yelp’s Local Economic Impact Report. By February 2021, only around one-quarter of the surviving businesses were operating at full capacity and more than half didn’t expect to be back to normal for at least six months.
When Small Businesses Close, Recession Fills the Void
The cost of small-business closures is usually calculated in terms of job losses. But when a small business pulls up stakes, the impact goes far beyond lost paychecks.
“When one closes, the ripple effects are massive,” Donaldson said. “Not only does it affect the culture of a downtown or a neighborhood, but [it] may [also] affect the viability of other businesses in the area — less foot traffic, etc. More importantly, it affects families. The closing of a business not only hampers the cash flow and ergo spending power of the people who own the business, but also the cash flow and spending power of the employees and their families. They spend less in restaurants and retail, they aren’t buying new cars, they aren’t doing renovations or upgrades on their homes. It becomes a local recession.”
The Death of Small Businesses Kills Cultures and Communities
Local recessions can lead to population loss and a depleted tax base, which sends residents packing. Poor people, the elderly and other vulnerable populations are most likely to be left behind with fewer prospects, fewer services and a lower standard of living.
“We’ve seen this in several mill towns in the Northeast,” Donaldson said. “A factory closes, putting a large chunk of the population of that town on the unemployment rolls. They leave the town in search of new work, the housing market is affected, the local grand list is lowered so less tax money is flowing, which in turn affects the social services and schools. A once-thriving community can become a ghost town quickly. Family businesses — especially small family businesses — matter.”
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Last updated: April 12, 2021