The Long Covid for Small Businesses

Long Covid effect is seen in all the closed shops, the empty stores in malls and shopping centers

A small business is generally classed as one with fewer than 100 employees. Most small businesses are sole proprietorships with the owner and perhaps one or two employees. Plumbers, carpenters, gardeners, mechanics, family owned restaurants, even many lawyers, accountants, and countless small service providers use this simplest of business forms. All that is generally needed is a business license, a tax ID, and announcing the intent to commit business.

It is easy to start a small business, but infant mortality is high. Roughly two thirds of new small businesses fail in the first two to three years of operation. Once past that early period, though, those who survive often continue for many years providing a good livelihood for their families and any employees. At least that was true prior to Covid. The nationwide lockdowns of the Covid tyranny hit the survivor small businesses hard.

Unlike large corporations, most small businesses did not have the resources to continue to pay rents, pay off loans, keep employees, or even cover the basic living expenses of the owners. Businesses that had operated successfully for decades were forced to close their doors.

Estimates from several sources suggest that over one-third to as many as one-half of small businesses shut down as a result of the Covid lockdowns. Even today, the long Covid effect is seen in all the closed shops, the empty stores in malls and shopping centers, the phones that are no longer answered for all the services we took for granted.

Some might ask why these people don’t just start up their businesses again and pick up where they left off. The reason lies in the difference between starting a business and operating a business.

Starting a business requires capital for such things as a store lease, initial inventory, equipment and fixtures, advertising, locating and hiring employees, and numerous other expenses. Most of these costs are borne by the entrepreneur, typically by loading up credit cards, borrowing from friends and family, second mortgages, and other personal sources. Most banks and the Small Business Administration (SBA) will not lend to startups and require several years of operating history. It can take several months to a year or more before a new business reaches breakeven where revenues equal expenses, and the startup expenses can begin to be repaid.

First is the exhaustion of credit by people who had to borrow on credit just to survive

On the other hand, operating businesses only need to cover current expenses such as rent, supplies, payroll, taxes, and such. With operating history, banks and the SBA will consider loans for such things as business expansion, renovation, or other defined needs. Typically, operating expenses are much lower than startup expenses.

A second consideration is customer base.

A restaurant, for example, develops a clientele of regular customers, as well as a reputation for its cuisine. When a restaurant closes, those customers go elsewhere. It can take years to rebuild a customer base even if the restaurant re-opens at the same location and name. The same will be true for almost any other small business.

The net result is a profound effect on the national economy in several unobvious ways. First is the exhaustion of credit by people who had to borrow on credit just to survive. That means that capital that would be needed to restart a business, or to start a new business is not available. A second effect is that the labor pool is reduced. People who worked in small businesses had to seek employment in large firms and are no longer available. Worse, some of them simply retired.

Working at a small business is much different than being an employee at a large firm. An employee at a small business usually has much more autonomy and responsibility, as well as more influence on the operation of the firm. In many ways they are almost like a partner to the owner. Typically, the pay is better than that of many large firms, and employee value is recognized and appreciated. For many employees, they learn valuable skills about running a business so they are able to go and successfully start their own firms, or even take over a business when an owner retires.

The flow of capital through small businesses to provide good employment and a healthy economy has slowed to a trickle. The question becomes: how to restart the flow?

Large firms typically consider employees to be interchangeable parts to be acquired for the least cost. Autonomy is minimal, and people are often confined to one specific role with little opportunity to apply other skills or to grow. Payroll is considered an expense that can be managed to maximize the profitability of the firm—laying off employees to manage cash flow if business flags, or outsourcing work to locations with lower labor costs to improve profits.

The way that employment is measured and reported further hides the issues involved. Job reports treat all jobs as equal, even though a minimum wage job does not have the same economic benefit as one that is two to three times minimum. Treating all jobs as the same puts small businesses at a disadvantage by presenting an unrealistic picture of the health of the economy.

In reality, the employees and owners of successful small businesses have more money to spend and support an economy. Large company employees often operate just above survival level, and don’t have the discretionary funds to spend that would provide stimulus for new business formation and growth.

Ultimately, we see the sort of situation we have today. Job numbers are high, many new jobs are created, unemployment rates are low, and the economy appears healthy, but yet the housing market is stagnant, new projects are on hold, higher level positions are not being created, and lots of good paying jobs such as software development are being filled outside the country. The capital that would be moving through a healthy economy is tied up in debt service.

The long Covid effects of lockdowns on small businesses are still with us. The flow of capital through small businesses to provide good employment and a healthy economy has slowed to a trickle. The question becomes: how to restart the flow?

In the good old days, when water was pumped by hand from a shallow well, it was often necessary to “prime the pump” by pouring some water down it so that the pump valves would function properly to draw up more water. We can “prime the pump” of small businesses in a similar way.

DOGE has shown the huge quantities of taxpayer funds that have been diverted to unproductive activities

DOGE has shown the huge quantities of taxpayer funds that have been diverted to unproductive activities, to large organizations that return little, and even to harmful uses. Tens of billions of dollars have been given to organizations that provide no benefit to the country. Some of those funds can be made available for more productive uses. Congress, or even the Executive branch could redirect a portion of those recovered funds to encourage small businesses in a variety of ways. Some include:

• Provide grants to small businesses that have 2-20 employees. A billion dollars could provide 200,000 $5,000 grants that would make a huge difference as a kind of economic “force multiplier”.
• The Small Business Innovation and Research system (SBIR) is intended to direct a portion of government research funds to small businesses, but the process of obtaining such funds is cumbersome, takes six months to a year to obtain, and has reporting and paperwork requirements that make it not worth the effort of application. The UK has programs that provide contract money to small businesses in two to three months, with modest paperwork and overhead requirements. A similar program here could use a billion dollars to provide $100,000 contracts to support innovation in 10,000 small firms.
• The government will happily spend $1,000 to make sure a dollar is well spent. The regulatory burden on a small business is nearly the same as on a major corporation, in terms of reporting and monitoring, but a large corporation can have a small compliance staff, while compliance for a small business can consume an unsupportable portion of the business effort. Argentina is enjoying an incredible rebirth of its economy resulting largely from major cuts to its regulatory systems. Similar cuts here could unleash the same revival. After all, small businesses account for half the total employment, yet bear a disproportionate amount of the regulatory burden.
• Direct the SBA to provide grants and loans to early stage and startup businesses. Work with banks and credit organizations to reduce risks associated with funds provided to small businesses.
• Report not just the total number of jobs, but also the economic value of those jobs. The data is there.

Yes, there will be some abuse of these and other programs. That should not be used as an excuse not to do these things. The benefits will far outweigh the costs, and will more than cover the costs of abuse, especially if the laws relating to fraud and other criminal activities are enforced and widely publicized.

The long Covid for small businesses has gone on too long. It is past time to prime the pump and restart the economic engines of small business. Delay only makes recovery harder, and takes us to the brink of collapse.