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Outside the Box: Don’t call it a recovery yet: Small business growth still lags

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Lawmakers have pointed to stabilized GDP and a surging stock market as evidence that the U.S. is poised to return to “normal” after 2020’s economic catastrophe. But GDP and the S&P 500
SPX,
+0.36%

are not adequate proxies for real-world conditions, especially for the smallest businesses, the ones that define American neighborhoods and communities.

After the crash of 2008, the U.S. government emphasized stabilizing financial markets over assisting small businesses and struggling households. Even if well intentioned, the resulting redistribution aided mostly the top few percent.

Now the already-substantial gap between the largest and the smallest firms has widened, according to new survey data. Businesses with more than 100 employees are growing, but the outlook for businesses with fewer than 20 employees is considerably more uncertain.

These smallest businesses represent 90% of all U.S. businesses, employ half of American workers and generate half of the nation’s economic activity. According to the data, the smallest businesses saw profits dry up completely, and reported just 2% revenue growth year over year. 

Outcomes have begun to diverge, raising concerns about a so-called K-shaped economic recovery. Wall Street has regained its footing but Main Street may need more support to rebound. 

Small businesses will eventually bounce back, but better measures of business health — including access to funding, staffing and hiring, restored supply chains, consumer confidence, and the availability of goods and services to small business buyers — could give a clearer picture of the U.S. economic situation.

On one hand, revenue for the small business sector as a whole has declined by one-fifth. On the other, recent data show the percentage of small business revenue from online sales increased to 57% from 37% in less than one year, owing to changes in consumer behavior and small business offerings during the COVID-19 lockdown. 

Many businesses executed impressive pivots to stay afloat in the COVID confusion. Yet tens of thousands more — and no one’s quite sure how many — sank into insolvency and will not reopen. Meanwhile, a record 4 million new businesses were registered in 2020. During one three-month stretch, the country added more new businesses than any other quarter in its history

New data from small-business decision makers gives a better understanding of their well-being. Asked how they would know their business had fully recovered from the pandemic, most said that reliably making payroll was the crucial test. “Paying employees their full wages without concern” outranked owner salaries, increased revenue, or customer demand as the key signal for a small-business recovery. 

Increased need for services has led to innovation. The smallest firms are most likely to adopt emerging technologies, as they don’t have to contend with large legacy systems. The already rapid digitization of customer relationships, and the growing ratio of online-enabled offerings, may have been accelerated by as much as seven years

One of the success stories of the COVID recovery so far has been the Small Business Administration’s decision to include fintech firms in the distribution of the Paycheck Protection Program. Early on, PPP funds mostly went to the largest businesses, as pre-existing relationships with major banks were a prerequisite for loan success and many banks used customer portals to collect applications. 

Fintech firms were arguably a saving grace for the smallest businesses. Yet, even with their help, outcomes were still skewed: one in three businesses with more than 100 employees received the forgivable federal loans; just one in seven of the smallest businesses received help. Small-business owners continue to see cash flow as a major challenge in coming years. 

Like the consequences of the shutdown, the recovery is far from uniform. Booming growth, bull markets, crypto surges — these have little relevance to the real-world health of the U.S. economy. A decade of “Roaring 20s” celebration is possible, but it’s not here yet. If the needs of the smallest firms are not perfectly aligned with the needs of the largest, their recovery won’t be, either. 

Kathryn Petralia is co-founder and president of financial-technology firm Kabbage, an American Express company.

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