Why support small businesses?

Over the coming weeks and months, economic developers and other small business enthusiasts will inevitably hear some variation on the following question:

“Why should taxpayers be forced to spend money saving small businesses?”

It’s a good question, and it provides an excellent opportunity to help the questioner better understand how dependent our local, state, and national economies are on small business. There are many good answers to this question. Some are data-driven, some are simply common sense.

 From a data perspective, we must be aware that:

• There are just over 30 million small businesses in our country. The general standard for defining a business as such is fewer than 500 employees, but the reality is that the vast majority employ fewer than 20.
• Small businesses in America employ nearly 60 million people—that’s 47.5% of the entire American workforce.
• Small businesses add, on average, approximately 2 million jobs per year.
• In South Carolina, small businesses represent over 97% of employers in the state.
• South Carolina’s small businesses employ nearly half of the state’s workforce

It is essential to understand that the majority of the financial support being offered through the U.S. Small Business Administration is in the form of loans that must be repaid with interest. Forgivable loans and grants are narrowly targeted at maintaining small business employment during the most challenging time of this crisis – when revenues are significantly lower because fewer individuals are purchasing due to a variety of factors (social distancing, quarantine efforts, and personal income reduction due to loss of employment or reduction in hours worked).

If small businesses disappear during this time because for a 3-6 month window they cannot cover operating expenses due to an unforeseen large-scale crisis, what will happen to the people they employ, their families, and the communities in which they operate? That’s an economic and civic blow from which individuals, families, and communities will likely not recover quickly, if at all. Making the assumption that small business owners who close now will simply re-start their businesses once the economy improves is dangerous. There are too many factors outside of their control – access to working capital, the overall state of the economy, personal spending patterns in a post-pandemic world, ongoing supply chain impacts, etc. – to fully support this hypothesis.

From a community standpoint, as downtowns and other commercial centers experience a significant increase in vacancy that comes with widespread small business closures, a number of both tangible and intangible things begin to occur: loss of civic pride, which leads to a loss of the sense of place the community creates; increases in vandalism and other crime; and real or perceived diminished quality of life. There is also a net negative effect on the businesses that survive if fewer people frequent these public spaces.

Another economic reality is that larger enterprises are not prepared to absorb the volume of workers displaced due to widespread small business closure. As a result, sustained spikes in unemployment and underemployment are likely, and it is difficult to project exactly how long those spikes might last. Social safety nets will be strained as family finances suffer and resources that could be directed towards economic growth may instead be redirected into social services.

It’s also critical to remember that small business doesn’t exist in a tax-free vacuum. Small business owners also pay taxes – sales tax, payroll tax, personal and corporate income tax, business license tax, and possibly hospitality and accommodations taxes as well. The individuals they employ and the suppliers from whom they order goods and services also pay income taxes on their earnings. Small businesses are contributors to our system, not resource drains.

Finally, we have to acknowledge that the loss of small businesses impacts revenues, an impact felt most keenly at the local government level. With fewer resources to allocate, services outside of public safety may be reduced or eliminated entirely, thereby contributing to a real or perceived decline in quality of life. This impact will be felt most acutely in small, rural places.

The bottom line is that it is necessary to re-frame the question for understanding. It’s not about “forcing” taxpayers to save small businesses. It’s about understanding that small business truly is the backbone of our economy, and there are potentially perilous outcomes at both the personal and community levels if large-scale action isn’t taken to preserve it.