Small Businesses Matter: Navigating the AI Frontier

The past few years have witnessed feverish interest in the promise of artificial intelligence (AI), with some observers even naming 2023 “The Year of AI.” The market capitalization of large technology companies creating AI models and tools has jumped. Venture funding to any startup that incorporates AI has skyrocketed. Policymakers in Washington, DC, and around the country have expressed both skepticism about and enthusiasm for AI. Many state legislatures have undertaken efforts to address AI policy, and members of Congress have sought information from a variety of sources—including the Bipartisan Policy Center—on AI.

Lost in the hype is a close examination of how small businesses, one of the largest parts of the U.S. economy, are testing AI tools. Although small businesses are often portrayed as technological laggards, evidence is mounting that these firms are not just integrating AI into their operations, they are in many ways leading AI implementation throughout the economy.

Adding to this growing evidence, BPC and Morning Consult conducted a survey in December 2023 to better understand AI’s role in small business digitalization. Our poll found that a significant share of small businesses is doing the hard work of adopting and testing AI tools to discover what does, and does not, work for their company. In the past year, the adoption of digital tools among small business owners and executives has surged as they increasingly integrate AI into their operations.

For the most part, our survey revealed both excitement and concern among small business owners and executives about AI’s possibilities. Several key themes emerged from our survey: Most interestingly, while small businesses are driving the adoption of AI, this adoption is not even across types of business owners and companies.

Key Themes

1. Small businesses are on the forefront of AI adoption.
2. Young and minority small business owners lead AI adoption.
3. Small businesses need more help from the federal government to expand adoption and aid the integration of AI-tools.

AI adoption and utilization by small businesses promise to drive productivity gains, which will benefit the larger economy. Between 1995-2021, small businesses created 63% of all new jobs. Today, they employ almost half of the private sector and represent $413.3 billion of exports.

AI-powered applications are crucial to overall success of small businesses and to their economic impact. Adopting AI-powered tools helps small businesses cut costs, increase profits, improve productivity, compete for market share, and better serve both their employees and customers.

With nearly 3 in 5 small business owners and executives planning to make some investments in AI this year, barriers and gaps in adoption must be addressed so firms can leverage the benefits of AI-powered applications. To encourage the adoption of AI, policymakers will need to take different approaches to microbusinesses (those small business with fewer than 10 employees), small businesses run by older owners and executives, and long established small businesses.

Methodology

To understand attitudes and practices associated with the adoption of AI-powered tools, which can occur with a wide range of business activities, BPC and Morning Consult fielded a survey of 498 business owners and executives from firms with between five and 249 employees in December 2023. The margin of error was plus or minus 4 percentage points. Throughout the report, we refer to these survey respondents as “small business owners and executives.” The data is unweighted because the sample is comprised of two audiences – small business owners and executives. In addition to the survey, BPC hosted roundtables with small business owners and founders of AI-powered startups. Insights from those discussions also informed this report.

Small businesses are on the forefront of AI adoption

BPC-Morning Consult’s survey revealed a notable trend in AI integration among small businesses: They are using AI and are interested in learning more about this digital tool. Survey findings showed that 57% of owners and executives were incorporating AI to some extent in their operations, while nearly a quarter stated that they interacted with AI “very often” within their companies.

“Artificial intelligence has positively impacted our business by streamlining processes, enabling us to grow and scale our project workload in a manageable way. The project management benefits are endless, and we are seeing double returns on productivity.” – Small Business Owner

The level of interest in and support for AI among small business owners and executives is significant, with 64% of respondents believing that the benefits of increased adoption outweigh the drawbacks. Notably, 83% reported that AI has benefited their businesses. Furthermore, 79% of survey respondents reported they were likely to attend an event to enhance their knowledge of integrating AI into business operations.

Small businesses are using AI in a variety of business operations.

When asked about the AI-based technology they use most, small business owners and executives cited accounting (48%, e.g., QuickBooks) and customer management and communication (48%, e.g., Microsoft Office and Mailchimp) as the most prominent areas of integration. Other commonly used features include gaining consumer insights to inform business strategies, content creation and marketing, and workforce and project management.

Small business owners and executives are leveraging AI’s power to help them manage a diverse range of business operations. The integration of AI-based technologies allows them to streamline their workflow and to accomplish tasks more efficiently, including improving organization and fostering innovation in their marketing strategies.

AI has a positive impact on small business growth and business operations.

Survey findings reveal that not only are small businesses using AI, but they are finding the technology to be effective for them. Most prominently, 54% said AI contributes to business growth. Additionally, small business owners are leveraging AI because it positively impacts their customers’ experience (53%), boosts profits (48%), and enhances cybersecurity capabilities (48%).

Small business owners and executives expect AI to continue to be beneficial, with 61% saying that they expect a positive impact on growth and 61% saying the same for customer experience. Small business owners and executives shared similar optimism for other areas, including profitability and competition with bigger businesses, which rounded out the top four areas of current positive impact.

“AI helps increase capacity so we can engage in other human-oriented tasks. Because we have more information, we can be faster and more confident in our decision-making.” – Small Business Owner 

Young and minority small business owners lead AI adoption

Although most small-business owners appear eager to capitalize on AI’s potential, others are more hesitant. BPC’s survey findings reveal that younger owners (ages 18-44) and minority owners are driving the adoption of AI among small businesses. Additionally, distinct patterns emerge when analyzing AI adoption based on the number of employees at a business.

Differences by Demographics  

Younger small business owners and executives ages 18-34 (76%) and 35-44 (70%) exhibit significantly higher rates of AI use compared with those ages 45-64 (44%) and 65+ (33%).

Additionally, nonwhite business owners and executives reported considerably higher adoption of AI in their operations than their white counterparts. They were also more likely to be early adopters of new digital technology. Seventy-six percent of Hispanic and other minority small business owners and executives reported using AI to some extent, compared with only 54% of white small business owners and executives.

Small business owners and executives ages 18-34 (68%) and 45-64 (55%) said customer experience was where AI has had the greatest positive impact. Owners ages 35-44 (74%) and 65+ (48%) reported that AI has had the greatest positive impact on the growth of their business.

Differences by firm size 

When examining the most common uses of AI by firm size, we found that the smallest companies (those with 5-100 employees) predominantly use it for accounting and customer management purposes, consistent with the larger trend across all small businesses. For small businesses with 100+ employees, customer management remains a top use (56%). However, due to their larger workforce, the second most common use of AI shifts to workforce management. Similarly, small businesses with 51-100 employees also focus on workforce management (40%) as a key use.  

Across all four sizes of small businesses polled, owners and executives consistently highlighted customer experience and business growth as the two primary areas where AI has made the greatest impact. Notably, small businesses with 5-10 employees reported that AI had the greatest positive influence on customer experience, while businesses with 11-100 employees emphasized its impact on the growth of their business. Small business owners and executives with more than 100 employees reported AI’s greatest positive impact is on their ability to compete with larger companies.

The future benefits of AI are perceived differently by small business owners and executives across various firm sizes. Owners and executives with 5-10 employees continue to believe that AI will have the greatest impact on their customers’ experience, while those with 11-100 employees believe the greatest impact will be on the growth of their business. Small businesses with 100 or more employees believe that the greatest impact will shift from their ability to compete with larger firms to the overall growth of their business.

Future Plans

Most small business owners and executives surveyed indicated a desire to invest in AI-related technologies. The use of AI among small business owners and executives is expected to continue to rise, with 58% of those polled expressing their intention to make an investment. Notably, this percentage is significantly higher among nonwhite small business owners and executives.

When looking ahead at the future use of AI, younger small business owners and executives were much more likely to say they intended to invest in AI over the next year: 73% of those ages 18-34, versus only 49% of those ages 45-64. Similarly, 80% of business owners and executives from minority groups intended to invest in AI, compared with 54% of white business owners.

Small businesses need more help from the federal government to expand the adoption and integration of AI tools

The adoption of AI among small businesses has surged and shows no signs of slowing. This adoption benefits the overall economy. However, it is crucial for policymakers at all levels to acknowledge the particular challenges facing small businesses and to explore how the government can further support them during this wave of innovation.

Small business face challenges in AI-tool adoption and integration.

Among those polled, the majority reported that the most significant barrier to the adoption of AI-enabled tools was cost (55%).

Other noticeable barriers to adoption of digital tools and new technologies is a lack of knowledge about available AI products and their benefits for small businesses.

Data privacy is another concern for small business owners and executives (52%), while a lack of digital literacy remains a top concern: 50% reported a lack of knowledge about which tools to use, 48% cited concerns over their employees’ lack of digital skills, and 46% worried about the cost of training employees.

In roundtables BPC held, small business owners and executives echoed these concerns. One participant expressed worry about “rules around how AI can be used since they are inconsistent around the country.” Another reported concerns about “security,” both of their data and their customers’ data.

Small business owners and executives also cited uncertainty regarding government regulations (50%) as a barrier, though the salience differs by business size. Regulatory uncertainty was the top challenge for businesses with more than 100 employees, while smaller businesses were more likely to see cost as the greatest concern.

“The cost to keep up with the developments in AI cost so much that we are not gaining any market share that does anything but pay for the AI.” –Small Business Owner

Regarding barriers faced by small business owners and executives from various ethnic backgrounds, nonwhite respondents cited the costs of tools and concerns over possible government regulations as the top two barriers they face in using AI. White small business owners and executives also mentioned cost concerns alongside data privacy concerns (54%). Other notable barriers included not knowing what tools to use and employees’ lack of digital skills.

Policy Considerations

“It’s important to ask who or what industry isn’t at the table when it comes to AI.” – Small Business Owner

When asked what would be most helpful for AI adoption and use, 47% of respondents said they would prefer financial assistance through grants to access AI technologies, train staff, and cover adoption costs, while 34% said technical assistance and training resources on how to use AI technologies would be helpful. Notably, more than two-thirds of small business owners and executives were interested in using Small Business Administration loans to fund the adoption of AI technology in daily business operations.^[1]

Smaller businesses (those with between 5-100 employees) were more likely to prefer financial assistance, while businesses with more than 100 employees preferred technical assistance. This split could be attributed to differences in financial ability and capacity between businesses with fewer employees and those with more. Smaller firms need the funds to adopt the technology and train their workers, whereas larger firms are more likely to already have the resources to do both and so prioritize assistance navigating implementation at scale.

AI’s rapid explosion means policymakers and small business owners are still adapting and understanding this technology. The pace at which legislators approach this issue will be critical as AI continues to evolve. As policymakers engage in discussions and navigate this changing landscape, small businesses must have a place in their plans.

Policymakers should keep a few principles in mind moving forward.

Promote growth by ensuring cost is not a barrier to adoption | Small business owners overwhelmingly noted cost as a barrier to using and integrating AI-tools into their business operations. The cost of the programs, their integration, and the training of employees are all concerns. Equalizing access to AI tools through loans, grants, or technical assistance programs can ensure interested businesses have an opportunity to benefit and grow.

Provide small businesses with up-to-date technical assistance | For many small business owners, technical assistance can mitigate implementation challenges. In past BPC small business roundtables and reports, many participants were unaware of federal technical assistance efforts, and those who do use the programs noted the content is outdated or inapplicable. Current technical assistance programs and trainings need to be better marketed and include current, relevant content to be effective.

Emphasize and codify “Responsible AI” | Responsible AI highlights the importance of safety, transparency, and ethics in its development and application. Establishing comprehensive frameworks for developers of AI-powered tools and users will improve AI’s reliability and responsible use. Mitigating any harm that comes from adopting AI tools is crucial for small businesses to maintain trust with customers and employees. This principle will make for a smoother transition to AI applications and platforms that can drive small business growth.

Create greater flexibility in government small business programs | Expanding government programs, such as SBA-backed loans and technical assistance, to include AI and digital tool adoption can increase access to both funding and digitalization for small businesses.

Conclusion

Small businesses are driving AI adoption. They implement tools quickly and see a positive impact on their business operations and growth when they do. Minority and younger business owners are key in this transformation. Continued adoption and integration of AI platforms by small businesses will help boost economic growth. As the AI landscape continues to evolve, legislators will need to ensure that small business are front and center in policy discussions so they can better support and expand AI adoption that leads to economic prosperity.

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[1] BPC Action endorsed S.2330 – Small Business Technological Advancement Act, which would clarify that small businesses can use 7(a) loans to finance technology that supports daily operations, including inventory management, product delivery, and accounting systems. The bill was introduced on June 17, 2023, by Sens. Jacky Rosen (D-NV) and Ted Budd (R-NC).