Persisting Problems: Exploring Four Small Business Challenges in a Post-Pandemic Era

Even before the COVID-19 pandemic, small businesses experienced difficulties with access to capital, workforce/competitiveness, procurement, and child care. Small businesses are recovering from the pandemic, however the government support businesses received in the form of tax credits, loans, and grants have expired. The Fed’s 2022 Small Business Credit Survey found that revenues remain below pre-pandemic levels for 63% of firms, and 76% of firms decreased employment or paused hiring. The government has already applied billions of dollars towards small business issues, but the persistence of these challenges emphasizes the need for renewed attention and other reforms to support growth and recovery.  

The Bipartisan Policy Center’s (BPC) Business project published “From Pandemic to Prosperity: Bipartisan Solutions to Support Today’s Small Businesses”, a report exploring the four principal areas — access to capital, workforce/competitiveness, procurement, and child care — where small businesses face challenges, in collaboration with Goldman Sachs 10,000 Small Businesses Voices. Discussions with members of Goldman Sachs 10,000 Small Businesses Voices, policy experts, current and former government officials, and members of Congress and their staff shaped the issue areas and suggested policy options outlined in the report. 

When it comes to accessing affordable and flexible capital, small businesses have always had a harder time, especially business owners of color. Research done by the Federal Reserve has found that Black-owned businesses considered to be “low credit risks” are less likely than other small businesses to receive all the financing they seek and less likely to be approved for financing. Small businesses need access to affordable and flexible external credit options to grow. External sources of funding are primarily banks, who expect documentation and paperwork that small businesses often do not have or do not have the bandwidth to provide. Presently, lessons learned from pandemic programs can be used to improve access to capital for all small business owners. Programs such as the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) provided an opportunity for expanded credit options as well as the use of online lenders. A BPC report from June 2021 noted that, “It seems clear from the data that some types of online and alternative lenders help fill a gap for those small businesses that don’t have a preexisting relationship with a bank, don’t have high credit scores, or don’t have as much collateral as others.” For small business owners of color, online lenders are important in closing the gaps in accessing affordable and flexible credit options, with more straightforward application processes and by potentially reducing bias.  

In 2022, 72% of respondents to Goldman Sachs 10,000 Small Businesses Voices national survey who expect to take out a loan or line of credit will do so to grow their business. Application rates for traditional financing, approval rates for financing, and the likelihood of receiving funding desired are all on the decline according to the Small Business Credit Survey. This decline is why policy options that broaden access to loans of many sizes, keep in mind that small businesses rely on personal sources of funding, and keep up with the innovation of the private market are key.  

Another hindrance to growth is the ability to compete with larger companies. Small businesses cannot afford the cost of providing competitive benefits, which leads to hiring and retention issues. According to the Small Business Credit Survey, 60% of businesses surveyed noted that hiring or retaining qualified staff is one of the top operational challenges they experienced in the last 12 months. As one small business owner pointed out, “Labor costs are really high, and I cannot financially afford to compete with the starting salaries and benefit packages that big businesses can provide.” Two-thirds of respondents in the 10,000 Small Businesses Voices national survey who were having difficulty retaining employees said they “can’t afford to compete on benefits,” and 39% can’t afford to offer a retirement plan. Labor costs have always been an obstacle for small businesses; however, the pandemic significantly affected these costs, with the effects continuing to be felt presently. Dealing with this compounded issue poses a big challenge for business owners. 

While hiring and retention needs have been met with policy action in the past, and more aid brought on by the pandemic, existing policies do not work to address the problem. Small business owners find themselves unable to use policies – such as the Employee Retention Tax Credit or paid leave – due to a lack of information or because they better suit the needs of larger firms. Past BPC work has pinpointed the need for improving workplace retirement plans and allowing employers to enroll employees in emergency savings accounts. These two policy options along with tax credits for hiring and retention are important to addressing the gap small businesses face in competitiveness.  

Small business growth and expansion is crucial to local job creation and a healthy industrial base. Small businesses can address both needs through procurement. However, the number of small businesses taking part in government contracting has shrunk even though procurement spending has increased. With confusing processes and paperwork, it is daunting for small business owners to participate in government contracting. When businesses do put in the hours to become a contractor they are met with a lack of communication, delayed payments, and poor incentives. The federal government is required by law to appropriate a set percentage of contracts to small businesses – a goal they have consistently met in past years – however, they do not meet set goals for women-owned businesses, service-disabled veteran-owned businesses, and HUB zone small businesses. One small business owner emphasized the need for accountability, “Procurement goals are just that: goals. There is no accountability for any agency [when goals aren’t met].” Other BPC work has noted the present administration’s efforts to boost small business participation in the procurement pipeline, and future policy action must also distribute responsibility among all stakeholders (the small business, the contracting officer, the program officer), and provide greater assistance in navigating the complex contracting system. 

Providing and accessing affordable, quality childcare is another barrier to small business expansion. Restrictions and a broken basic business model have hindered opportunities for affordable and quality child care. The ability to offer child care is a sticking point for small business owners who want to offer child care to support their employees, but simply cannot afford it, further placing them at a competitive disadvantage to larger firms. “I’ve had a desire to provide child care for years,” one small business owner mentioned. The Bureau of Labor Statistics found that just 6% of workers in companies with fewer than 50 employees worked for firms that provided or sponsored child care compared to 25% of workers at the largest companies. Past BPC research has found that in 35 states, including the District of Columbia, about 1 in 3 children (ages 0-5), with all available parents in the workforce lack access to a child care program in their community. Almost all child care providers are small businesses, but business owners are faced with high operational and labor costs, and complex regulation. This dual sided problem to child care for small businesses requires policy options that support competition and parental choice, allow local flexibility and innovation, and aims to fix child care business model.  

The pandemic has provided an opportunity for discussion and action on the enduring problems small business owners experience with access to capital, workforce/competitiveness, procurement, and child care. There are ongoing efforts to provide solutions, but there is more work to be done. The policy options included in the report, “From Pandemic to Prosperity: Bipartisan Solutions to Support Today’s Small Businesses”, all derive from guiding principles that should be the basis for future policy action.  

Read the section summaries here 

Read the full report here