The Secret Ingredients to Thriving Small Businesses
Sponsored: Why did the COVID-19 pandemic cause some businesses to close, while others persisted? Here’s the support economists say small businesses need most.
The COVID-19 pandemic dealt a heavy blow to small businesses, but a silver lining emerged amidst the shuttering of storefronts: a clearer understanding of the types of support small businesses need to survive, grow and compete in today’s digital economy.
While access to lending tends to top small-business owners’ list of challenges — and receive the most analysis — the pandemic shed light on other key types of support that build economic resilience among small businesses. We talked to researchers about two of those less obvious factors: strong networks and digital capacity.
The hidden role of “social capital”
The Paycheck Protection Program (PPP) was the most notable federal support for small businesses to come out of the pandemic, but not all businesses benefited equally.
In the initial round of funding for PPP, 42% of loans went to small businesses with 10-499 employees — even though those businesses accounted for only 4% of all U.S. small businesses. These loans were risk-free, positive net-present-value, and forgivable. So why didn’t all small businesses take advantage of this opportunity?
One likely contributor was that micro-businesses with fewer than 10 employees were less likely to have an established relationship with a bank, and later phases of PPP targeted other lenders, including CDFIs, to reach a more diverse set of businesses. In addition to the role of banking relationships, however, economist Vojislav Maksmovic of the University of Maryland says there could also be another, more subtle, answer to the disparity.
He recently studied how social capital — essentially people’s network of relationships in the society they run in — impacted who seized the opportunity of PPP loans. By measuring the uptake in PPP loans, Maksmovic found that four measures of social capital — civic capital, social connections, local pride and trust of banks — explain 25% of the variation of PPP uptake at the zip code level.
Maksmovic views the pandemic-spawned PPP loans as a natural experiment, or a real-life version of the “helicopter drop” economic thought experiment, which considers how a community responds when everyone is given a sudden, one-time opportunity to obtain funds that seemingly “fell from the sky.”
“The government is giving everyone these loans — but who takes them?” asks Maksmovic. “There are big differences across the country as to who takes them — at a county level, zip code level, and even a little at the neighborhood census block level.”
While the PPP program has wrapped up, the study highlights the role of what some economists call civic capital: how engaged and collaborative residents, business owners, nonprofits and other community members contribute to the success of their community. Embracing inclusion, collaboration and a shared vision can have wide-reaching and economic effects for cities.
“Civic capital breaks away from this idea that one side wins and the other side loses,” Maksmovic says.
How going digital impacts local economies
We’ve long known that internet access is an equity issue, and cities ranging from NYC to Detroit to Colorado Springs have launched initiatives to bridge the digital divide. Small businesses with limited internet access and usage need to compete with those already taking advantage of online tools that increase discoverability, streamline communications, and collect data that can be used to inform business decisions.
“Putting digital tools into the hands of small business owners is critical for unlocking the full potential of today’s economy,” says Shamina Singh, president of the Mastercard Center for Inclusive Growth, whose Strive USA program invests in digital capacity building. “Going digital can help small business owners gain timely insights to grow revenue, improve financial resilience, compete with larger businesses, and strengthen the economic foundation of the communities in which they operate.”
A recent study on digital economic activity and resilience for small and micro-businesses during COVID-19 illuminates just how website presence in a region affects not only businesses’ own resilience, but also that of the local economy as a whole. The study found that metropolitan areas “with higher concentrations of businesses with an online presence” saw “more positive economic perceptions and outcomes from April to December 2020.” The study was conducted by Karen Mossberger, a researcher and professor at Arizona State University, who argues that broadband use is a form of digital human capital. “Whether the community is online and connected makes a difference in terms of fostering an ecosystem of innovation,” she says.
The study mapped business website domains and broadband usage by zip code. Researchers were able to measure local economic impact using anonymized and aggregated commercial data on consumer spending and small business openings and revenue, as well as U.S. Census Bureau data. They found that lower-income areas had lower rates of internet use and that areas with a higher concentration of registered websites saw positive economic benefits. The presence of business websites in combination with broadband usage had an even more significant effect.
The pandemic underscored the importance of businesses having an online presence, and digital access will become increasingly advantageous. For instance, “technology can connect rural communities and tribal communities,” Mossberger says. “If someone has a niche business, you don’t have to rely on the neighborhood. You can get customers from around the country.”
Mosberger says developing digital skills and tools will become increasingly important for small business development programs. From the study: “Local economic development strategies often focus on attracting technology firms when considering the digital transformation of the economy; but addressing the digital needs of small business may be one path toward a more inclusive and equitable recovery for communities.”
Stepping into that gap is Strive USA, which aims to strengthen the ecosystem by enabling organizations that can support small businesses in accessing capital, growing their networks and know-how, and operating in a digital economy.
“The pandemic taught us a lot about what small businesses need to survive and thrive, and the opportunities that come with inclusive digital transformation,” Singh says. “Now, we need to bring together knowledge and assets from across financial services, non-profit, government, and technology sectors to deliver equitable solutions at scale.”
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