Small Businesses Are Braving a Stormy Outlook; Policymakers Should Follow Their Lead

The Goldman Sachs 10,000 Small Businesses community represents a network of more than 245,000 employees, more than 12,000 businesses served and more than $17bn in total annual revenues.

Small businesses are the first to be buffeted by difficult economic conditions, but even for the most agile and experienced among them, the current operating environment is particularly rough. Many small businesses were slammed when the COVID-19 pandemic tore through the global economy, and from surging gas prices to staff retention, the challenges just keep coming.

According to a June survey of more than 1,500 members of Goldman Sachs’ 10,000 Small Businesses program, 78% of small business owners believe the economy has worsened in the last three months, and 93% are worried about the U.S. economy experiencing a recession.

This is a stormy outlook, but there are two reasons for optimism: the creativity, resourcefulness, and fortitude of America’s small business owners, and their support for bipartisan policy solutions, including reauthorizing and modernizing the Small Business Administration.

Economic Conditions

For many small businesses, the economic environment is problem enough: 89% of small business owners say broader economic trends, such as inflation, supply chain issues, and workforce challenges, are having a negative impact on their business. Gas prices alone are causing headaches, as some 80% say higher gas prices are negatively impacting their business.

For Suzanne Batlle, owner of Azucar Ice Cream, which has stores in Miami and Dallas, these trends impact almost every cup of ice cream she sells: “The cost of milk alone is up 50%, to say nothing of logistics. A shipment of ice cream cups I ordered three months ago is finally due to be delivered — but now I’ll have to pay an outrageous freight charge. Everywhere you turn there’s a roadblock, and small businesses are getting slammed.”

Batlle is not alone among her peers. Almost two-thirds of those polled by Goldman Sachs have increased the prices of goods sold or services offered to offset inflation and other economic obstacles.

Getting the Workforce Right

For many small businesses, finding and retaining qualified employees remains the most vital concern, even more than both inflation and supply chain issues.

More than 40% of those polled said hiring challenges had worsened over the last three months, with 87% of those hiring finding it difficult to recruit qualified candidates for open positions. There was almost unanimous agreement among those small business owners that difficulty with hiring is impacting their bottom line.

Such was the shortage of skilled labor in Iowa, that Perlla DeLuca, owner and CEO of Southeast Constructors in Des Moines, took workforce shortages into her own hands: by opening a construction school to train new employees.

“The pandemic certainly made things more difficult, but we were already struggling with workforce shortages before COVID-19 hit. Almost an entire generation of workers — those who would be trained in the family construction business — are missing. We need a fix for that, which is why we’ll be opening our school in September,” says DeLuca.

In time, DeLuca plans to educate more than 1,000 students a year in the 20,000-square-foot building she’s refurbishing. Like many small business owners, DeLuca will be operating this new venture alongside her existing construction business.

Of small business owners having difficulty hiring, 63% cited high labor costs as a reason for their challenges, with competition against larger employers on pay and benefits a critical obstacle.

Hiring Help

About 90% of respondents would support policymakers taking action to help address small business workforce and competitiveness challenges. Policy solutions to address these concerns already exist. Policymakers should also support small businesses in their quest to offer retirement plans, as well as workplace training and certification.

As David Simnick, co-founder and CEO of Soapbox Soaps in Washington D.C., notes, there’s good reason to support small business hiring: “If you look at job creation around the world, it is often not coming from incredibly well established organizations. The jobs are coming from upstarts and entrepreneurs.”

Renewing programs like the Employee Retention Credit, which gave employers tax credits for wages paid to workers but expired in 2021, and enhancing the Paid Family and Medical Leave tax credit, which needs to be better advertised and understood, are vital first steps — with plenty of upside.

Kei Okumura of Sugarbird Sweets and Teas in Los Angeles says it wouldn’t take much to encourage entrepreneurial immigrant communities to take part in existing programs: “A lot of people are resistant to things that are too good to be true. More information would have a big impact in different communities and different cultures.”

Small Business, Macro View

Macroeconomics really matter. Almost 40% of small business owners have seen a decline in customer demand as a result of inflationary price increases, and 75% say their business’s financial health over the past six months has been negatively impacted by inflation, which is up 9.1% in the past year according to the U.S. Bureau of Labor Statistics.

Michelle Pusateri, owner of Nana Joes Granola in San Francisco, has taken a series of steps to navigate inflation: “Being able to secure ingredients is my primary concern. We’ve been working with suppliers – farms – directly, which helps their margins and normally allows us to buy more. More generally, we’ve been buying in bulk to protect against price volatility. Securing ingredients by the literal truckload has ensured our ability to deliver, but the flipside is that it puts huge pressure on our working capital. In June, I had to take out a loan to make the numbers work.”

Still, bags of Nana Joes Granola have changed in size. “We were really transparent with our customers, and carefully planned our communications that we have had to reduce the quantity in the bags to ensure prices on the shelves didn’t change,” said Pusateri.

Between inflation and supply chain issues, it’s a one-two punch: almost 80% of respondents say supply chain issues have either persisted or worsened in the last three months, and only a handful (9%) expect their supply chain issues to subside within the next six months.

A differentiating factor for Pusateri given supply line snarls has been the strength of her supplier relationships: “I really try to keep the lines of communication open, and lead with compassion and empathy. It’s not just a transactional relationship. Our suppliers are struggling in this environment too. Looking out for each other and treating folks with mutual respect is absolutely a reason why the ingredients we need are available to us.”

As with labor concerns, there’s clear support for policymakers to take action: almost 90% of respondents would support policymakers taking action to help address inflation and supply chain challenges.

For many small businesses and their employees, the stakes are high: “Who wants to take out a loan just to stay in business? Where does that end? I haven’t got a Plan B here — and neither do my fifty employees,” says Batlle.

Capital City

As at the height of the pandemic, a component of the solution is access to flexible, affordable capital. Access to credit (or relief) is vital if small businesses are going to have to compete in inflationary markets or work their way around a disrupted supply chain.

There are other benefits to making capital more accessible. “What a small business is typically up against nowadays are large companies consolidating with smaller companies,” says Michael Cao, founder and CEO of IC3D in Columbus, Ohio. “Capital formation that’s non-dilutive makes a huge difference as small businesses look to compete.”

Capital is particularly key for the most underrepresented groups: programs like Community Advantage, which provides loans to Black and Hispanic small business owners, should continue being extended or made permanent.

Small Business Administration, Big Impact

If policymakers are to match the ambition and potential of U.S. small businesses, they’ll need to deliver concrete policy changes. Of foundational importance would be the renewal of the Small Business Administration, which was last reauthorized more than twenty years ago.

Polling suggests broad support: 88% of small business owners say it is important for Congress to prioritize reauthorizing the SBA. As DeLuca notes, “The SBA as it exists today just isn’t set up for small businesses, especially after the COVID-19 pandemic.”

For Pusateri, some of the fixes are straightforward: “Filling out the paperwork for an SBA loan is itself a job, and it can be incredibly confusing. The sheer volume of forms made it impossible for some companies to apply for the right loans, and get the access to funds they needed. An SBA support framework — even examples of all the documents perfectly executed like a sample loan application — would have been really helpful.”

A reinvigorated SBA, equipped with additional resources and new capabilities, could play a key role in driving a bipartisan agenda devoted to helping small businesses realize their full potential.

Despite the many headwinds, there are plentiful opportunities for small businesses to grow. Of the many enterprises Goldman Sachs works with through 10,000 Small Businesses, almost all have set their sights on their next big move. In fact, 65% of those polled say they are optimistic about the financial trajectory of their business this year.

This is not a question of charity or handouts. It’s a long-term investment in the health of the U.S. economy. As Talha Faruqi, president of Aventure Aviation in Peachtree City, Georgia, says: “Not only are small businesses the backbone of the US economy, but all the big companies that you see today were small businesses once.”

To learn more about bipartisan policy solutions that will help small businesses, their employees, and their communities, visit the 10,000 Small Businesses Voices policy page. Or, visit the 10,000 Small Businesses Summit page, to learn more about Goldman Sachs’ 2022 Summit: Small Business. Big Voice.