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Strategy November 02, 2018

The State Of Small Business

By  John Corrigan

Small business creation in the United States is at a 40-year low, despite a vibrant economy and cautious optimism heading into 2019.

Between 1977 and prior to the Stock Market crash in 2008, the number of new businesses fluctuated between 500,000-600,000, according to U.S. Census Bureau data. In 2015, the latest year surveyed, a total of 414,000 businesses were formed. That’s well below the 558,000 companies launched in 2006, the year before the recession set in.

Why haven’t small businesses bounced back yet? Entrepreneurs and policymakers tried to figure that out during a “State of Small Business” conference hosted by The Washington Post on Thursday.

Mallory Shelter, owner of Washington D.C.-based Mallory Shelter Jewelry + SHELTER, recently transitioned her online business into a brick-and-mortar location. She said that finding talent and access to capital were the biggest hurdles in the process. “You have to cover build out and inventory buying and a lot of upfront buying,” Shelter said. “Historically, it’s hard for people, but I was very lucky to get a business loan. It’s also tough finding people willing to work for a small business, going through all the highs and lows that come with it and sort of being a jack of all trades.”

Hiring challenges are echoed by small business owners throughout the US. According to the most recent National Federation of Independent Business (NFIB) survey, 53% of small business owners reported few or no qualified applicants for positions they were trying to fill. A historically high percentage (22%) cited the difficulty of finding qualified workers as their “single most important business problem.”

“Tax compliance and tax burden has fallen off the top five issues of concern for the first time in 30 years,” said Tom Sullivan, vice president of small business policy at the U.S. Chamber of Commerce. “But we have a lot of small businesses around the country that are jealous of Mallory for being able to hire seven people in six weeks.”

The entrepreneur credits Instagram for helping find qualified employees, especially in the Washington D.C. area. “There’s not that creative economy that’s strong in other cities,” Shelter said. “Then again, I’m offering a part-time retail position, which isn’t always as glamorous. I’ve found people who are working this in addition to other jobs to maintain their lifestyle and be able to afford living in D.C. or because they’re looking for a creative outlet on top of a 9-to-5 job. I’m always fearful that someone will leave or I’ll be short staffed.”

In order to maintain her current workforce, Shelter pays $15 an hour to her part-time employees, well above the minimum wage. The possibility of a federally mandated minimum wage was brought up earlier in the conference, which was lambasted by White House National Economic Council Director Larry Kudlow. “A federal minimum wage is a terrible idea and will damage particularly small businesses,” Kudlow told The Washington Post’s Robert Costa. “To force them to take a payroll increase would be silly. Idaho is different from New York. Alabama is different from Nebraska.”

Skyrocketing healthcare costs are another major concern for small business owners. Both Shelter and Gary Williams, co-founder of Washington D.C.-based marketing agency Creative Theory, said they’re covered by their respective spouse’s health insurance plan. Neither provides health insurance for their employees, confessing that it’s too daunting and expensive to pursue right now.

As an alternative to traditional healthcare coverage, the Trump administration has supported association health plans, which allow small employers to band together to purchase the types of coverage that are available to large employers, which can be less expensive and better tailored to the needs of their employees. “It’s beneficial for small business owners because it spreads the risk and lowers the cost,” said Allen Gutierrez, associate administrator at the U.S. Small Business Administration.

However, 11 states and Washington, D.C. are suing the Trump administration over these plans, claiming they offer less coverage and consumer protections than are required by law, The Lincoln Journal Star reported. “Unfortunately, we think the rhetoric about that is part of fake news,” Sullivan said. “We actually believe Secretary (of Labor) Acosta crafted the association healthcare rule in a way that makes sure all the protections under the Affordable Care Act extend to the association health plans. If you follow the models that are happening in these state and local chambers of commerce and you talk with them about the offerings, you’ll actually find out that this is an exciting opportunity to help provide guidance to folks like Gary and Mallory.”

As if the current obstacles for growth weren’t enough, small businesses will have to deal with the ramifications of the US-China trade war very soon. As the world’s two largest economies impose tariffs on each other, business leaders are being forced to decide whether to absorb the extra cost or pass it along to consumers.

“It’s already happening,” Sullivan said. “Cost escalation is already happening and we’re pretty scared that that will be a headwind. Small businesses don’t have the luxury of looking five to seven years out. They’re much more beholden to price changes. The longer it goes on, the worse it is for small businesses.