Protecting Gateway City small businesses through the pandemic
A new poll paints a damning picture for businesses across the state, but women- and minority-owned small businesses in Gateway Cities are especially at risk. Can we save them? Dr. Tracy Corley, MassINC TTOD Fellow, says all is not lost.
A Bleak Picture for Gateway Cities
A new poll from The MassINC Polling Group on small business resiliency and survival has immediate — and dire — implications for Massachusetts’ Gateway Cities.
In the poll sample, 27% of respondents were from Gateway cities, which correlates with population demographics — roughly 25% of the state’s inhabitants live in these 26 regional cities. With little distinction between statewide and Gateway City findings, nearly all of what the poll found applies to our Gateway Cities.
The poll findings show that small businesses in Massachusetts have suffered serious damage due to the COVID-19 pandemic, with just one in three reporting they are fully open. Financial results for the first half of the year show the scale of the challenge, with 64% of small businesses reporting drops in gross revenue of 25% or more for the first half of 2020. Nearly half (46%) of small businesses said they have laid off or furloughed employees, including 77% of restaurants. Businesses owned by women and people of color were hit particularly hard and reported greater financial losses.
This paints a damning picture for communities and entrepreneurs across Massachusetts, but as small businesses in Gateway Cities are more likely to be smaller and Latino-owned, there is cause for additional alarm and urgent response.
The data show that small businesses, especially ones run by entrepreneurs of color, lack access to equity or debt financing. Historically, banks and financial institutions have intentionally excluded these entrepreneurs, leaving them to frequently start their businesses with personal savings, borrowing from friends and family, or by mortgaging their homes.
In addition, businesses that are structured as sole proprietors, S-corps, and some partnerships are pass-through organizations, meaning that the owners are personally responsible for any business liabilities and debts. Many of them might be able to hold out for a few months, but if more do not get some sort of sustainable relief in the coming years, they will find themselves up against the wall was trying to make their mortgage payments or face creditors seeking their personal assets.
Given the lower rates at which Black and Brown people own property and their drastically lower wealth, this means that the wealth gap will widen even more, creating a chasm between the haves and have nots, especially in cities with lower income levels and property values. For women entrepreneurs of color, the effect will be even more pronounced.
But as even as municipal leaders try to provide relief, Gateway Cities are already facing fiscal crunches because of lower local and property tax collections and cost increases for dealing with the pandemic — and the declines in personal income, taxable transactions, and property values will inevitably roll up to the state level. This revenue hole will be around for years to come.
As bleak as this all sounds, all is not lost.
I have done a lot of study into Germany’s dual economic system, which has an industrial sector that operates much like our own US economy, focused on short-term growth and dependent on global finance and international transactions. The German industrial economy operates similarly but works alongside a domestic trades and crafts economy that includes hard-to-export services such as construction, health care services, beauty-related shops, restaurants, education, and other services that require manual labor and personal contact. This trades and crafts sector has shaped the apprenticeship program for which the country is known worldwide. In addition, these micro-businesses, which average 5 employees, tend to operate like a family, less likely to see their workers as a cost. That means they are slower to both hire and fire, and wages tend to be tied to better benefits and informal perks than in larger businesses.
We have a dual system in the US, too. But the Germans were early in realizing that protect local markets needed to be protected from the kind of economic fluctuations and shocks that aggressive growth markets can bring. In 1897, they created two different sets of regulations to govern the different ways in which service-based small businesses tend to be structured and operated when compared to larger, industrial sector corporations. Although these regulations have been modified to encourage more alignment between the two sectors, this structure persists and was hailed as a cushion during the last economic recession.
As recommended in MassINC’s TOD Equity report, regional economic development would benefit from more robust and resilient small business ecosystems that complement industrial-sector cluster strategies. This means connecting small, service-based businesses with technical assistance, financing, insurance, and products to operate efficiently and to be resilient in lean times by focusing on revenue and job stability rather than aggressive growth. A focus on stability allows for a diverse set of personal and business products and services to serve local and regional markets that work side-by-side with larger, growth-focus sectors like global manufacturing, finance, biotech, and others.
Moving forward, the state would be helpful by providing support for municipalities, particularly Gateway and regional cities, with funding and technical assistance so that they can craft robust economic development plans for building more resilient small business ecosystems that consist of service-sector and light manufacturing enterprises. Rather than shunting laid-off workers into the unemployment insurance system, the state’s Workshare program should be the default option for all businesses, without unnecessary paperwork. And the Commonwealth should think more about tiered and targeted grant and microgrant programs for microbusinesses, women-owned businesses, and entrepreneurs of color. We cannot treat our small business sector as a monolith.
Secondly, state and foundation-funded programs can be targeted to grants and low or no-interest forgivable loans to retrofit small businesses with protective gear, customer shields, updated ventilation and filtration systems, and expanding the space for retail and child care businesses, even by activating vacant space in Gateway and regional cities. Personal touch is going to be severely limited in the years to come, and high-touch small businesses will need long-term support, beyond three- to six-month moratoriums and bridge financing.
Local financial services institutions have been doing a great job providing grants and loans to small businesses, but more will be needed to stabilize our neighborhoods and local economies. Some ideas on how to be more aggressive to help head off a deeper economic recession and greater inequality include freezes on issuing dividends for certain investors, pauses on premium increases, automatic expansions of coverage for COVID-related claims for the next few years at no additional cost, and grants and forgivable or no interest long-term loans to businesses to offset revenue losses, protect payrolls, expanding financial services for co-operatives and employee-owned companies, and invest in employee and customer retrofits and expansions.
Another idea for financial services institutions comes from Ireland where banks, in collaboration with local authorities and the country’s equivalent of a Community Development Corporation, introduced a Mortgage-to-Rent program that was designed to stabilize neighborhoods. The program includes transferring mortgages to rental agreements with much lower payments and paths for tenants to convert their leases back to mortgages, penalty-free, when economic conditions improve. Such options would also probably require rethinking underwriting rules and other approaches to how we provide capital and revenue protection for the micro, small, and midsize businesses that make for diverse robust local economies and vibrant commercial and mixed-use districts.
As a Commonwealth, we need better, more coordinated data and program evaluation to ensure that investments reach the businesses who need them most, as opposed to getting siphoned off by those who have the most resources. The Commonwealth should also rethink its taxation structure, which allows multibillion-dollar companies to pay little to no tax, and which leverage millions in tax benefits without providing reliable economic benefits and stability in return. The state should also think about state-level incentives to target Opportunity Zone funds into deals that need help filling the gap between construction costs and market values in communities far from metro Boston.In the end, if small businesses cannot thrive to create places that people want to live, these large companies will relocate to places with better amenities for retaining and attracting employees and with better infrastructure getting workers where they need to go without congestion, pollution, and frequent system breakdowns. Despite the downturn, we must continue to invest in our region.
These are just a few ideas for protecting our small businesses and small business ecosystems to weather this pandemic. If we work together, we can lead the nation by innovating ways to curtail and reverse the divide between small and large businesses in the Commonwealth.