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From Small Business Rescue to Entrepreneurial Recovery

Small business is an apple-pie issue. Politicians from every point on the political spectrum love to express rhetorical support for small businesses. In her book, Fintech, Small Business, & the American Dream, Karen Mills, the former head of the Small Business Administration, includes a screen capture from HBO’s “Last Week Tonight” of dozens of politicians calling small business “the backbone of the economy.”

There are dissenters from this general position, but no self-respecting politician would be caught denying the significance of small business to the U.S. economy. Everybody agrees on the importance of small business and entrepreneurship and has to say they agree.

Entrepreneurs and small business owners, however, don’t really believe the politicians. In a 2020 Kauffman Foundation survey, 69% of entrepreneurs said they “do not think the government cares about them.” This accords with findings from prior surveys.

Why the disconnect? Agreement does not always translate into action, at least action that is meaningful for entrepreneurs and small business owners. Even if both Republicans and Democrats agree on the economic importance of small businesses and entrepreneurs, they may not share an appetite for acting—and they may not agree on what those actions should even be.

Over the last year, federal policymakers put pecuniary substance behind their rhetorical support. By allocating around $1 trillion for small business support via the Paycheck Protection Program and Economic Injury Disaster Loans, they showed a willingness to act on behalf of small and young companies.

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Now What?

That’s the question facing Congress and the Biden Administration. The government cannot keep giving direct financial support to small businesses—not fiscally, or mechanically, given the ongoing implementation challenges. Those billions of dollars supplied through federal legislation operated, for the most part, to positive effect. Yet at some point, public policy needs to turn from rescue and relief to growth and opportunity.

And that’s where hard decisions will need to be made, because hoping that $1 trillion in emergency funds bided time for a return to the pre-pandemic status quo is the wrong approach. The last 12 months exposed stark challenges facing entrepreneurs and business owners—all of which existed in February 2020. Deep-seated demographic disparities in business ownership and growth, geographic divergence in rates of new business formation and innovation, narrowing paths of entrepreneurial opportunity for many, and restricted access to finance for many potential business owners.

It’s easy to read an overly pessimistic picture into such challenges. There were many positive aspects to America’s small business landscape before the pandemic. In the first quarter of 2020, the Small Business Index produced by MetLife and the U.S. Chamber of Commerce hit an all-time high. Rates of business formation and growth by Latinos were running at record levels.

Yet the pandemic exposed issues that must be addressed if a strong entrepreneurial recovery is to be realized. We must rethink the orientation of public policy toward small businesses and entrepreneurs—and restructure our programs and systems of support.

Agreement to Appetite to Action

There’s strong agreement in Washington for acting to support small businesses and entrepreneurship. That’s been demonstrated rhetorically (the “backbone” parade) and, in 2020, financially with PPP and EIDL. Based on listening to lawmakers on Capitol Hill and officials in the Administration, there also appears to be an appetite for addressing the challenges exposed by the pandemic.

There is an opportunity for action that helps spur an entrepreneurial recovery that creates jobs and wealth for communities across the country.

This week, the Bipartisan Policy Center kicked off a series of activities to just that effect: From Small Business Rescue to Entrepreneurial Recovery. Over the next several months, through public events and data analysis and private discussion and more, BPC will examine several dimensions of small business and entrepreneurship, seeking to identify what needs to be rethought, what needs to be restructured, and where legislative action is possible and feasible.

Over the next several months, we’ll explore several areas:

  • Expanding entrepreneurial opportunity and diversifying the pipeline of potential entrepreneurs;
  • Improving public and private data collection to improve the evidence base of public policy;
  • Determining the performance of entrepreneurial development programs, and their role in supporting small business growth and entrepreneurial entry;
  • Catalyzing more innovation by more small companies in more parts of the country.

The focus of the series’ first event was small business finance. After the 2008-09 recession, commercial lending to small businesses contracted sharply and took several years to recover. Some expect a similar circumstance this time around. Yet in the intervening years, fintech innovation grew enormously, widening channels of financial access and lowering transaction costs. In 2020, for the first time, fintech companies were able to participate in SBA-backed lending.

The juxtaposition of small business struggles and fintech innovation will be a key indicator of the strength of entrepreneurial recovery. As the infographic we’re releasing today shows, small businesses have lost confidence in their ability to access a line of credit. Demand for SBA-backed loans has risen, not surprisingly, and most small businesses continue to rely on banks, both large and small, for financing needs.

Crafting policy for small businesses and entrepreneurs is far harder than expressing support for them. It’s hard to draw boundaries; it can quickly expand to cover numerous adjacent areas. Small businesses differ by age, size, sector, financing, owner characteristics, and so on. Public policy affects small and young companies in many ways. Improving that interaction can pave the way for a strong entrepreneurial recovery—and can be done with bipartisan support.