Every political stump speech, up and down the ballot and across the aisles, likely contains the refrains: “small business is the lifeblood of this nation” and “there’s nothing more important than supporting our small businesses.” You can practically see the montage of a gently-waving flag, and a friendly banker shaking hands with Ma and Pa Main Street in all the “feel-good” banking commercials. You’d be forgiven if you thought, of all the hyper-polarized political topics, that the plight of the small business is one of the few cases of truly bipartisan support.
Unsurprisingly, we find that this small business adoration is mostly just lip service. We see a persistent reliance on a “trickle down” approach by governments in designing small business support that mirrors all the other types of support that fight fires with a squirt gun– very little seems to make it to the end user by the time it’s been wrung through layers of government and the private sector.
To dispel the myths that we tell ourselves about how much we, as a society, love and support small businesses, we are going to look at the state of Main Street small business in this exploratory series. We’ll discuss small (as normal humans think of it) versus “small” from a government/banking perspective, assess the available support programs (financial and other), and try to make sense of the murky and ever-shifting future.
First, we need to get a quick overview of where we are from the macro perspective.
Does size matter?
“Small,” as defined by the Small Business Administration (SBA), in relation to qualifying for support and/or applying for specific government contracts, ranges anywhere from 1-1500 employees, depending on the company’s specific North American Industry Classification System– or NAICS– code. In some cases, it’s not based on numbers of employees at all, but on the business’s annual receipts, calculated in millions of dollars. There’s also an absurd number of footnotes that accompany the chart (which we’ve included here, should you be interested in scrolling through).
The definition of “small business” is now more important than ever, as evidenced, in part, by the widely-reported debacle that allowed companies like T.G.I Fridays to qualify for– and receive– millions in PPP, despite boasting 18,000 employees worldwide. Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP) were/are run through the SBA, and had/have a legal mandate to lend those dollars to companies with “500 or fewer employees.”
In practicum, however, small businesses with fewer than 100 employees constitute 78% of the estimated 59 million US businesses. Main Street is even smaller, where 70% of all businesses actually employ less than ten employees.
Have you even tried just not being poor?
Traditional SBA-guaranteed 7(a) loan products, on paper, are supposed to be reasonable, last-resort loan options for small businesses, but it is commonly understood that, in practice, those lifeline loans are largely reserved for the biggest “small” businesses, and applicants are still subject to the credit-worthiness determination of partnered banks (read: those same lenders who wouldn’t loan your small business money in the first place). The process can take as long as 18 months for even small loans– rendering any support ineffective for emergencies or for taking timely advantage of a market opportunity, such as a loan for raw material to manufacture goods ordered.
As much as banks may hate it, businesses aren’t rolling in cash– any business. This was painfully illustrated when firms, from Delta to your local dive bar, were begging for help with just a few weeks of our rampant consumerism put on hold.
While small businesses (and individuals) were given a patronising tsk tsk for not having months of cash reserve to weather an unprecedented complete cessation of revenue, multinational companies were able to grab millions (and even billions) of support, and got even lower loan interest rates than were available in the private markets, thanks to complicated finagling by the Federal Reserve to rescue low or no tax-paying entities like Carnival Corp (Carnival Cruises).
The SBA is just one piece of the larger puzzle. Banks, credit unions, investors, and even other governmental agencies like the United States Department of Agriculture (USDA), the U.S. Department of Labor (DOL), and the U.S. Department of Housing and Urban Development (HUD) are also important players in this discussion. How money is distributed, and to whom, makes all the difference when it comes to small business support, especially time-sensitive support.
TGI Fridays is the real emergency
Emergency government programs, like the Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP) offering forgivable loans, were drained within days of opening applications. Policy dictated that federal money must flow through private lenders, and preferential banks, such as J.P. Morgan Chase, used their streamlined systems to bank their sweetheart clients first, before others could even apply (a practice for which a class-action lawsuit in California has already been filed). This contributed to the PPP money being sucked up by entities like TriArtisan Capital Advisors (TGI Fridays), Foremost Maritime (the family business of our Secretary of Transportation/wife of US Senator Mitch McConnell), and Forbes Media; they got millions of dollars in expedited emergency aid, while smaller entities were left out to dry.
According to a recent survey released by the Board of Governors of the Federal Reserve System traditional lenders to small and mid-sized businesses are tightening access to capital and pivoting toward lending mostly to larger businesses out of a perceived reduction in risk. Many banks are quickly reverting to their Great Recession-era practices, and that is not good for the small businesses of Main Street.
Worse, the opaque justification for avoiding small business risk is proving to be a modern redlining practice, as small businesses in poorer, urban neighborhoods– often owned by minority proprietors– are least likely to access capital, and most likely to be providing services in communities where “more bankable” chains and franchises are unwilling to locate.
Hey pal, if you want crazy luxuries like health insurance, why don’t you just go be a cog for a giant corporation?
If you happen to be among the generations of Americans whose net worth (and life expectancy) is likely to be less than that of their predecessors (probably because you’ve spent your entire adult life squeezed between two massive recessions) you’ve likely had someone wagging a finger and suggesting that you’re making a choice starting or working for a small business, when you could have taken a job as a cog for a “safer” giant corporation.
This begs, in one part, a philosophical question, and another part economics: why should we care if small businesses fail, because if small businesses can’t compete with giant businesses, don’t they deserve to die, because hey– free market?
We’re going to explore these axes in the articles to come, but for now, a primer on why AmazaGoogFaceDisneyMart doesn’t actually deserve to be the ruler of civilization, “free” market be damned.
As we learn to accept our artificially intelligent (AI) robotic overlords, megacompanies will require far less labor– we’re already seeing this. The “bring back the coal plants” mantra from the current administration fails to mention that the entire coal industry employs fewer people than Arby’s. A whole nuclear plant can run on 400 people– which is about the same number as Instagram employs, with a $100 billion valuation (if it were still an independent company not swallowed up by Facebook).
High-value corporations simply don’t need as many humans, and when they do, those humans tend to be paid poorly (e.g service staff), or not considered employees at all (e.g. Uber and most tech companies relying on “contractors”), meaning low wages and unpredictable hours; lack of benefits, such as health insurance, are more the norm than the exception. This doesn’t even touch on the outsourcing crisis, led by our country’s largest corporations, that we will explore in a later article.
Giant corporations value money and efficiency above all other considerations– guided by the rules of the Securities and Exchange Commission (SEC), and fiduciary responsibility to investors if they are public. But other things beyond profits are actually important to the human experience– clean air and water, for example, along with self-actualization and satisfaction in our work, the activity which consumes a majority of our waking lives.
If suggesting that humans shouldn’t be treated like disposable cogs for shareholder value is too touchy-feely for you– consider the threat to national security that a brief interruption of our supply chain wreaked during this pandemic. “Big Efficiency” is great when it works, but manufacturing critical supplies and growing food closer to home – something small, hyperlocal businesses are often better equipped to address from a production and distribution standpoint – is extremely important when a global event throws a wrench into our normal logistics.
Then there’s the diversity of products and services– if high-volume/low-cost was the key driver for everything we could consume, everything would be cheap, imported plastic, designed to break in three months, with zero customization. You have access to products and services as niche as you can imagine, thanks to small businesses.
Competition, like the 1998 New York Yankees vs your high school baseball team
Lastly, the expectation that a small business should be able to compete with a giant corporation shows a painfully shallow depth of understanding about how business and politics now work in this country.
Corporations get to enjoy market rewards with less risk– in a “too big to fail” era, the government barely slaps a large firm on the wrist for colossal mismanagement, and watches as it pays off its C-suite with multi-million dollar bonuses while collecting billions in taxpayer bailout.
Big corporations get to pay comically low federal taxes (or skirt them altogether) while the effective tax rate for small businesses remains comparatively higher, and their owners are often taxed twice. The IRS knows it’s way harder and more expensive to audit large corporations with their feisty in-house legal armies, and have been found to disproportionately target small businesses.
Big corporations often get to pillage the environment, in many cases helping to write the same environmental policy that allows for their pollution. They establish functional monopolies, and are rarely held accountable for criminal activities– and yet, they are considered to be “a person” as far as our law cares when they donate millions to political campaigns.
Said simply, if your business can’t afford to buy a politician or ten, you are left playing by the tenets of a brutalist form of capitalism, while your corporate counterparts are getting that sweet, sweet “socialism” with big dollar bailouts and “three martini lunch” deductible increases by way of policy priority during a pandemic. You’re not in the same league. You’re not even playing the same game.
If you, like us, believe that the real small businesses in our communities are still very much relevant and important, the good news is, we can work through our existing infrastructure to adjust policy in ways that can help, meaningfully. Let’s start small by calling out every politician who utters, “small business is the backbone of the economy,” and hold them accountable to proving it through their legislation. Find your representative’s contact info and reach out to them about the debacle of the PPP/EIDLs; ask why private banks get to use federal money to boost their favorite clients, while ignoring the recipients for whom that aid was truly intended.
In our next installment, we’ll dive into some specific policy issues. With a little understanding, we can all be better advocates for Main Street.
Written by Jack Storey and Casey Weber McCarty