Leveling the playing field for SMB’s

During the COVID-19 crisis, Bloomberg radio has started a segment to highlight the struggles of local small businesses. I was struck by the inherent disadvantages of being a speciality store during the crisis. Let’s say you own a toy store in a Main Street in a small town: Most likely you had to shut down for quite some time and are just now able to open for curbside pickup. Yet the Wal-Mart or Target up the road on the outskirts of town on the commercial strip of big box stores got to stay open because they also sell essential items that allowed them to continue their business. In Vermont, they tried to limit this unfairness, but these restrictions were not widespread (aside: as a parent quarantined inside a small NYC apartment in lousy weather for weeks, I think actually toys were quite essential).

This issue adds to my running list of disadvantages of operating a Small Business:

  • Access to Capital — Highlighted in my previous article on lending, small businesses are inherently risky borrowers and challenging to underwrite at scale for reasonable interest rates

  • Lack of Education - Most small business owners have a passion and expertise for their business, but rarely have the proper education in finance & accounting to manage it sustainably for profit

  • Elevated start-up costs - I used to live in Greenwich Village and recall walking by a new restaurant daily and watching them struggle for 9 months to renovate the space, get the necessary permits and open. Just before they opened, a sign went up for a vacant storefront next door that a new Dunkin Donuts was coming and within a couple weeks they were operating

  • Increasing rent - Small Businesses are typically a victim of their own success. They cluster in downtown areas, band together to improve them via Business Improvement Districts and as they see the benefits of their work, their landlords raise their rent. Furthermore, landlords prefer a “big box” because they can deal with a single, deep-pocketed corporation who is unlikely to fail during the course of a lease and can be sued without fear of bankruptcy if there are issues

  • Government Regulations - As an employer of a full-time domestic worker, I can speak to the challenges of dealing with the government and the “gotcha” nature in which governments regulate small businesses in a heavy-handed manner. It’s a real thing, not simply a Republican talking point. Regulations impacting the operations of small businesses are generally complicated, opaque, arbitrary and difficult to deal with. Businesses need to deal with a myriad of multiple local agencies, each with their own licensing & inspections regimes (e.g. some allow online licensing, others may require a physical notarized signature for a key document). A small business owner typically leans the hard way through fits & starts in at launch and through fines once operating

Government can help level the playing field for Small Businesses and I believe that it is necessary to do so. But before doing so, it’s important to state why I believe Small Businesses are so important (beyond employing people):

  • The provide necessary services - It’s not just restaurants that get all of the attention, doctors, veterinarians, private car services, hotels (most of whom are owned and operated by franchisees), pharmacies & many other critical businesses are small businesses

  • They improve their local communities - Ground floor retail businesses often band together to form Business Improvement Districts whereby they pay extra taxes to a non-profit that provides ancillary services to the commercial corridor like business promotion, sanitation, signage & special events

  • They are great for real estate prices - Many of the most desirable towns (E.g. Southhampton & Huntington, NYC, Portsmouth, NH, St. Augustine, FL or Newport, RI) have vibrant downtowns filled with independent small businesses. Take me to a planned development without small businesses and you’ll instantly think of adjectives like (dead, antiseptic, blah, boring)

  • We love them - You tell me about a great City , I’ll point you to beloved small businesses, whether a famous high-end restaurant, a legendary deli, a speciality food store or bakery

Small businesses aren’t a uniquely American phenomenon, yet it took travelog in the Arab World and walking the souks to see understand why some areas are conducive to the development of Small Businesses & others do not. Here are some characteristics I’ve seen of vibrant SMB clusters:

  • Dense environments with sub-divided spaces- Most small businesses don’t have much square footage and squeeze as much as they can in a small space. It also enables the network effects of shoppers walking in the area and the benefits of businesses serving each other

  • Small businesses get the best real estate - In Tunisia & Morocco where I’ve travelled, the souks are downtown and are the center of the city with big-box stores outside of town. Maintaining a vibrant downtown with primarily independent small businesses occupying ground-floor square footage is critical

  • Open squares & plazas free of major thoroughfares - Transportation policy can have a big impact. Whether in Italy, or the Arab world, you won’t see big highways and intersections with a lot of traffic in the middle of cities.

  • Entertainment - Whether snake charmers or street dancers, if you can attract and keep the attention of a crowd, the businesses in the area will be happy

As a result, through thoughtful & intentional policies, we can foster & revitalize our small businesses.

  • Impose a graduated income tax - Taxation has always been a hot-button issue and one that often drives business decisions. Yet it seems big businesses pay more than small businesses — and they get double-taxed. First they pay taxes on their profits, then owners get taxed on their income when they pull the profits out of the business. Often however, this is gamed where we see over-itemization and loss creation for tax purposes. We should create a flatter tax system with exemptions on all business taxes up to a high amount of personal income (e.g. $250k), limited deductions and a progressive system so that larger businesses pay more, up to a relatively low rate that is competitive internationally, but higher than the 21% currently on the tax code and less than the 35% it was previously

  • Build markets - Public markets seem to be all the rage. Government owned markets with low rents and small spaces foster small businesses and attract shoppers, both within and surrounding the markets This shouldn’t be limited to dining & specially grocery however. Governments can also use unneeded professional space to rent to start-ups as co-working and small office spaces, while sponsoring incubators to foster the creation of new businesses

  • Prohibit combining common spaces - Landlords prefer to rent to a big box because of the benefits of dealing with a larger, deep pocketed tenant. But in doing so, they force out successful businesses & harm the neighborhood who often has to endure years of semi-abandoned storefronts for the process to unfold. Combining spaces should require the approval of local community boards, backed with a justification and intended tenant. Charging landlords more for vacant storefronts will also support high occupancy rates will also support the vibrancy of commercial corridors

  • Simplify & digitize enterprise licensing and permitting - In New York City, the Bloomberg administration built NYC Business Express with wizards, online licensing & permitting and eliminated red tape (e.g. notarizing requirements) to help businesses understand the licenses they need, get them quickly & understand what they need to remain compliant. Government can support these efforts with dedicated Business Outreach teams to coordinate pre-opening inspections and understand what is required when well-written content is not enough. This reduces the need for expensive consultants to manage the process, many of whom are on the payroll of bigger franchisors

  • Develop education certification programs for small business owners - Most small business owners are really good at their craft, but never received a formal business education and may not have proper aptitude to make prudent business decisions. The owner of an auto repair shop may be a genius with a torque wrench, but may not best be positioned to figure out how to advertise his/her business or figure out the right time to open a second location. Goldman Sachs has an online program called 10,000 Small Businesses, jointly developed with Babson University which offers a “mini-MBA” for free to small business owners. Government can and should partner with programs such as these and accredit them to ensure as many business owners as possible receive a basic education in entrepreneurship without requiring expensive advanced degrees

  • Create new loan programs - It’s important to end with where we started, which is at the core of the problem for Small Business owners, access to capital, particularly short-term financing at reasonable rates. I would create a government-sponsored (e.g. loss guaranteed) program allowing private lenders to lend or provide lines of credit up to the higher of 36% APR or 20% over the prime rate for up to 2 years and $250,000 for operating businesses with business owners who have:

    • An accredited MBA or have passed an accredited business owner education program

    • Agreed to integrate their banking, accounting records, invoice, payroll & payment systems with a digital accounting platform like Quickbooks and Xero

    • A qualified Small Business under SBA criteria

This would in effect, partially nationalize the SMB lending market in a similar manner that the government backs the housing market with FHA programs, while providing opportunities for innovation in the lending market without gouging small business owners with exorbitant rates & reflecting the inherent increased risk for lending in the space.

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