Thirty-five percent of respondents from the Carolina Across 100 Survey said that loss of small business had a negative impact on their community during the pandemic. There is good reason to fear this loss. Small businesses play a vital role to their communities. Specifically, they provide economic mobility, breed innovation, deliver crucial services for communities and drive economic growth.
According to the U.S. Small Business Administration, prior to the pandemic small businesses were responsible for about 45 percent of the total U.S. economic activity and comprised of 47.1 percent of private sector employment. Overall, small businesses made up more than 99 percent of all U.S. firms and were responsible for creating about 8.4 million new jobs from 2000 to 2017. In 2017, 32 percent of these firms were minority-owned businesses and 42 percent were women-owned. North Carolina is nearly on par with these numbers, with nearly 98 percent of North Carolina businesses being defined as a small businesses, and accounting for 46 percent of private sector employment.
So how do we define small business? This definition can change depending on the industry, but it’s typically a business with fewer than 1,500 employees. Most small businesses have significantly fewer employees. In fact, according to the SBA, small businesses with fewer than 20 employees make up about 88 percent of all U.S. business enterprises.
Small Businesses Faced Financing Challenges Prior to the Pandemic
Before digging in to the new reality many small business owners faced during the pandemic, it is important to recognize that many small businesses, especially those outside of metropolitan areas, struggled to find sufficient funding before the pandemic. Prior to the start of the pandemic, the National Small Business Association reported that one-in-four small businesses was unable to access needed financing. The funding gap was most prominent for financing amounts under $5 million, largely because public markets and institutional fund investors are typically not interested in transactions below this threshold. Additionally, one-third of small businesses cited credit availability as an important current financial challenge. Studies show that businesses owned by women and underrepresented minorities are even less likely to receive outside investment and loan denial rates are significantly higher.
The Pandemic was tough on Small Businesses
From around January to April 2020, small business sales in North Carolina dropped 20% or more. Surveys indicated that 70% of small businesses were concerned about financial hardship due to prolonged pandemic closures, and 58% worried about having no choice but to permanently close.
Now, as many businesses start to re-open, there are new challenges. In particular, small businesses have greater competition for attracting and retaining workers in the tight labor market, especially for low-skill jobs which have rebounded significantly in recent months. According to the National Federation of Independent Business’s September jobs report, 51 percent of small business owners reported job openings that could not be filled, which is well above the long-run historical average of 22%. Additionally, global supply chain disruptions have caused shortages and price spikes for a wide variety of goods. The struggles these small businesses face will most likely have long-term consequences for the economic resilience of businesses in North Carolina.
Business Formation Takes Off – But Out of Necessity?
An additional potential bright spot in the overall bleak year for business in 2020 was that new business formation was the highest it has been in more than 15 years. There was a spike for both high-growth potential and other new businesses. This growth in business formation occurred throughout the United States, and among a wide array of industries. Fortunately, the trend has continued through 2021 with only a slight recent tapering. North Carolina also experienced unprecedented new firm formation in 2020 with more than 133,000 EINs being issued. This is a 29% increase over the prior year and an all-time record.
Nonetheless, it is important to recognize that some of this growth in business formation is due to necessity entrepreneurship as more workers were displaced during the pandemic. According to the Kauffman Foundation, the rates of necessity entrepreneurship rose sharply in 2020, and rates of opportunity entrepreneurship experienced a 25-year low.
In our next posting, we will examine the role of various assistance programs in helping North Carolina small businesses survive the pandemic, and hopefully start to thrive as the economy continues to recover.