Written by Jodi McLean, Chief of Staff and Business Development at Economic Impact Catalyst.
Economic development efforts have traditionally focused on attracting and retaining large companies to a region. Economic Developers have long ignored microbusinesses, those with between 1 and 9 employees. The pandemic had one powerful and positive outcome: it shined a light on the importance of microbusinesses to the economy. Pandemic-related surveys of businesses revealed surprising numbers of facts. According to the SBA small businesses have created 2 of every 3 new jobs over the past 25 years. Today, microbusinesses make up 75% of all private sector employers and 90% of all small businesses in America. Pandemic-related data on small businesses and PPP grant allocation provided Economic Developers with a better understanding of the difficult journey entrepreneurs take from startup to second-stage growth. As a result of these findings, entrepreneurship-led economic development is now taking center stage.
Three leaders in economic development were invited to the June 2022 EIC Catalyst Network Discussion Series webinar. The panel discussed how to empower microbusinesses and what Economic Developers can do at the federal, state, and local levels. The featured panelists were:
- Suzanne Perreault, Michigan Economic Development Corporation
- Ryan Cobbins, Energize Colorado Gap Fund
- Connie Evans, Association for Enterprise Opportunity
- Moderator: David Ponraj, Economic Impact Catalyst
To view this discussion, click here. This blog outlines some of the key points and statistics shared by our guests.
Why the Sudden Focus on Microbusinesses?
Knowing that microbusinesses make up 90% of all US businesses and create 2/3 of new jobs in the US, it is important to support them. Failure to do so will have a negative impact on more than the business owner. It will impact employment rates, communities and the economy as a whole. Microbusinesses play a crucial role in restoring the economy and contributing to a future of resilience and strength in our communities. It is crucial to support microbusinesses and build attractive regions. To attract larger companies to a community, we need mom-and-pop shops, third places, coffee shops, and coworking spaces.
More data and impact reports will be available as the pandemic ends. Now, Economic Developers are focusing on the known issues that need to be addressed:
- Access to capital for microbusinesses
- Innovative support solutions for microbusinesses
- Changes in policy
- Regulation for advancing technologies and future trends
Access to Capital
According to the SBA, small business financing is one of the most important policy issues in America today. Small businesses’ ability to access sufficient financial resources will determine whether they can continue to drive innovation and growth as well as job creation in the U.S.
Small business capital problems are not new. It’s not easy for entrepreneurs to find affordable capital that is fair, accessible, and affordable. The economic collapse that followed COVID-19 was the only catalyst for small businesses to receive long-awaited attention. A quarter of micro and small-sized businesses closed temporarily in 2020. However, the 2020-2021 crisis and inequitable implementations of the American Relief Program Act of (ARPA), revealed serious weaknesses in the way we support and fund small businesses.
Capital access is in dire need of innovation. Larger lending institutions are more likely to approve large loans than smaller ones that require just as much work. Microbusinesses are unlikely to be able to obtain credit lines, even if they have a revenue of more than $1MM annually.
Our Catalyst Network guests discussed how to bridge the gap in capital access for microbusinesses. This was especially true for rural-based and minority-owned businesses. Lenders could offer capital that is not just debt. Revenue-based financing, for example, would be a new way to put money into a business while not removing equity. A change in the criteria lenders use to assess creditworthiness and risk could result in higher loan loss ratios, as well as offering smaller lines of credit (or microloans) that will allow microbusinesses to have liquidity to weather storms. Regulations must also be in place to mitigate high interest rates on business cards and loans. The panel discussed more ideas about accessing capital when they turned their attention to innovation in support of microbusinesses.
EIC’s white paper provides guidance on reforms that will improve capital access.
Innovation in Supporting Microbusinesses
With the recent allocations of ARPA funds, technical assistance (TA) has become a hot topic within entrepreneurship-led economic development circles. Although entrepreneurs don’t necessarily know what TA is, they do know that they need trusted guidance. Research has shown that microbusinesses can grow 30 times more revenue if they have access to capital along with trusted guidance to best utilize those funds. Microbusiness owners play multiple roles within the company, including IT, HR, and accountant. Many times, they don’t realize they are in trouble financially or legally until it is too late. Access to trusted connectors such as the chambers and neighborhood development organizations or religious organizations is crucial to connect entrepreneurs with the wraparound services they need. Once capital is deployed, these services and technical support are critical to ensure success.
Innovation could be reimagining the delivery of TA and creating standard measurements to ensure that economic development organizations follow the same guidelines.
There are many new technologies that can be used to access capital; for instance, simple, digital tools around cash flow management, and an app called Founder Tribes that applies the same kind of technology to swipe left or right to get a match and find the right lending source or mentor.
It can take time to pass effective policy. However, it is crucial that we address policy for microbusinesses, right now, to rebuild our economy and communities. Our panel discussed the possibility of policy changes to increase grants for microbusinesses. This would replace high-interest credit lines and the associated debt. Perhaps more grants could not be tied to emergency situations like the COVID pandemic. These grants, such as the Kauffman Foundation’s Catalyst Fund proposal, could be offered year-round, in a structured way to help businesses get off the ground.
Another policy consideration is with antitrust laws. To determine how big tech can “give back” services to microbusinesses or startups, a framework is necessary. This antitrust framework could be used to hold large tech companies like Google and Facebook accountable for their compliance with these laws. Instead of charging local businesses for technologies that will help them scale and grow their startups, this framework could allow big tech companies to provide the technology for free. This policy would help to boost entrepreneurship in the local communities. Instead of spending $300-$400 per month for Google Workspace, a small business could use that money locally to hire a part-time employee or for business support services.
Regulation for Technology and Future Trends
As microbusinesses become more prioritized, it is important to think about the future. It is worth looking at possible trends that could affect them such as ESG initiatives or changes in currency. ESG Investment (Environmental Social and Governance) could pose challenges for suppliers by imposing restrictions and implications on microbusinesses, particularly those that are BIPOC-owned. How will cryptocurrency impact our currency exchange and loan process? Will these rapidly expanding fintechs present opportunities or risks to microbusinesses and startups?
Microbusinesses are not the high-growth startups that are the darlings of investors and media. However, they provide the steady heartbeat of the American economy. Economic developers are increasingly prioritizing microbusinesses in grant allocations and projects. They must also ensure that policy is in place to support microbusinesses now and protect them from future pitfalls.
Click here to join future dialogues on entrepreneurship-led economic growth trends.
Connect with our webinar panelists by clicking the links below:
Suzanne Perreault: https://www.linkedin.com/in/suzanne-perreault/
Ryan Cobbins: https://www.linkedin.com/in/ryancobbins/
Connie Evans: https://www.linkedin.com/in/connie-evans-0a879a52/
David Ponraj: https://www.linkedin.com/in/davidponraj/
*View this video for all of the statistics, insights, and studies shared in this discussion.