Dear Divided Congress: Small Business First

Closely divided government, even with Republicans taking control of the House of Representatives, is set to continue. The new Congress will need issues that can both gain bipartisan support and stimulate the economy. Here’s a suggestion: start with small business.

Prioritizing small businesses will loosen political gridlock because they offer both parties a way to support job creation, reinvigorate struggling communities, and enhance U.S. competitiveness.

Even after the searing experience of COVID-19, small businesses continue to be the backbone of the American economy. They account for 99 percent of employer firms and employ roughly half the country’s workers. Every year, young small businesses (those in business for fewer than five years) account for the lion’s share of net new job creation.

To help small businesses, policymakers should focus on three areas that business owners and entrepreneurs highlight over and over in conversations and surveys. They are workforce, capital, and workforce (again).

Address Hiring Challenges

In a September survey by Goldman Sachs 10,000 Small Businesses Voices, 47 percent of respondent small business owners said “difficulty finding and retaining” employees was the most significant problem they face. That was up four points from just a few months earlier. Similarly, the National Federation of Independent Business (NFIB) found that 46 percent of its survey respondents have job openings they are unable to fill—and it’s not for lack of trying.

NFIB finds that the net share of small businesses that have increased compensation, while ticking slightly downward this year, remains at historically high levels. According to the 10,000 Small Businesses Voices survey, one of the biggest hiring challenges is that “big businesses offer more generous retirement and health insurance benefits.” That’s not necessarily surprising. Big businesses are, well, bigger and can spread the costs of retirement and health benefits over a larger pool of employees.

For small businesses, the financial and administrative burdens to this are high. In our conversations with scores of small businesses over the past two years, we have heard repeated iterations of this observation: “tax credits are too expensive for small businesses to take advantage of.”

Hiring challenges hurt job creation and business growth: nine in 10 respondents in the Voices survey say difficulty hiring affects their bottom line. And while many small businesses do offer these benefits—52 percent of workers at businesses with fewer than 50 employees have access to a retirement plan—more can be done. Congress could help by directing the Small Business Administration (SBA) and other agencies to increase awareness of what’s already available for small businesses, reforming existing tax credits for small employers, and creating options that work better for small businesses. Promisingly, a suite of bipartisan bills that could pass this year, known as “SECURE 2.0,” would expand the tax credit for small employers establishing retirement plans. This would be a strong signal of support for small firm job creation.

Expand Access to Capital

Financing is a perennial challenge for small businesses, many of whom operate on thin margins or with only a few weeks’ worth of cash buffer. They need external capital to hire, make investments, and set aside for tough times.

Emerging from the pandemic, small businesses are ready to grow. Over half of respondents in the NFIB survey have made a capital expenditure in the last six months and one quarter plan to do so in the next few months, figures roughly comparable to pre-pandemic levels. Half of small businesses surveyed in a recent Bipartisan Policy Center report plan to invest in digital tools within the next year.

Many, however, continue to suffer a COVID hangover, with damaged balance sheets and perhaps lower credit scores. Some 40,000 small businesses also remain in a kind of purgatory, imploring SBA to act on their applications for Economic Injury Disaster Loans (EIDL) filed prior to the May 2022 deadline but stuck in bureaucratic limbo. Congress could request that SBA clear this EIDL backlog.

SBA has also been moving to expand access to capital, from permitting higher interest rates on small loans in its 7(a) loan guaranty program to proposing changes to underwriting criteria for government-guaranteed loans. Lawmakers can help by pushing SBA to address questions about regulatory oversight and capacity to ensure that changes work for both small businesses and lenders. Also helpful would be incentives to encourage lenders to work closely with small businesses to repair balance sheets in ways that don’t unintentionally restrict credit.

Enhance Worker Skills

Finding workers—and offering benefits—is not the only labor-related challenge bedeviling small businesses. Among those firms actively hiring in the 10,000 Small Businesses Voices survey, 86 percent say it’s difficult to recruit qualified candidates. In the NFIB survey, labor quality has spiked in relative importance among small employer companies. On this front, Congress has two major opportunities to improve workforce training and ensure the needs of small businesses are being met.

Two major pieces of workforce legislation are up for reauthorization by Congress in the next few years: the Workforce Innovation and Opportunity Act (WIOA) and the Perkins Career and Technical Education Act (Perkins Act). The former provides federal funding for workforce training programs and public-private partnerships; the latter supports career and technical education programs at secondary and postsecondary levels. While small business participation in these efforts is always desired, it is hard to apply for and benefit from these programs. Streamlining and ensuring that small employers are involved in design can help ensure that workers develop the skills they need.

Lawmakers should start with these top issues. Small businesses can continue to be an engine for growth—they just need a little spark.