From Survival to Success: Small Businesses Find New Footing

During the pandemic, you couldn’t go a day or two without hearing about another small business closing up shop: the gym down the street, the two-decade old furniture emporium, even venerable institutions like The 21 Club in New York City.

But nearly five years later, many small businesses are proving how resilient and adaptable they’ve become. Since 2019, small businesses have created more than 70% of net new jobs, and optimism is rebounding as inflation drops. A recent Pew Research Center survey found that 86% of U.S. adults say small businesses have a “positive effect on the ways things are going in the country these days” – outranking the impact of churches, schools, and the military.

Not only have many of these businesses survived, they’ve also retained some of the innovative, spontaneous practices that came about during the pandemic in efforts to stay afloat. Katz’s Delicatessen (famous from the movie When Harry Met Sally), for example, continues to offer nationwide shipping for some of its signature deli items, a service it launched during COVID-19. Farmgirl Flowers, known for its handcrafted floral arrangements, diversified its products to include DIY flower-arranging kits and specialty home goods.

With roughly six million small businesses nationwide, that’s a lot of “mom-and-pop shop” knock-on effects. Of course, with the Small Business Administration defining companies with 500 employees or fewer[PO1] [MOU2]  as “small businesses,” that six million figure includes many small-cap and mid-cap companies, in addition to your neighborhood favorites. Nevertheless, small businesses account for about 46% of total private sector employment and bring in more than $16 trillion in revenue annually, according to the Census Bureau’s Annual Business Survey. While applications to launch small businesses dipped during the pandemic, there were nearly 1.8 million filed last year, with Florida, California, and Texas leading the way in number of applications per state.

Lingering Inflation Effects

Despite overall optimism, the lingering effect of inflation is one of the biggest headwinds for small businesses today. With high interest rates, many small business owners upped their credit card usage because of lack of access to decent loan financing. Average monthly credit card balances for small business clients are up more than 20% compared to 2019 average levels, according to Bank of America. But analysts note that as credit availability improves and interest rates fall, those balances may also come down as owners return to traditional bank financing.

At the same time, some mom-and-pop shops are dealing with high rents, with Bank of America’s small business clients reporting an 11% year-over-year increase in rent. That increase has cut into profit margins for small businesses, particularly those with revenues of less than $500,000. “Every time the rent goes up, we have to raise prices, to keep up with the cost,” Adelita Valentine, owner of HairFreek Barbers in Los Angeles, told the Associated Press.

Inflation has also had an effect on supply chains, with some owners no longer stocking certain products or shifting suppliers amid worries about availability or the cost of materials. In some cases, that means opting for higher-priced supplies. For example, Lisa Laufer, founder of aromatherapy company Nectar Republic in Wichita, Kansas, has hopped between suppliers for the salt she uses in some of her products. “We went from using a Pacific Coast salt to an European Mediterranean one because it was readily available, but it was more expensive,” she says. There’s also been a labor shortage, making it harder for mom-and-pop shops  to  offer pay that would attract quality workers.

A Boost from AI

A bright spot for many small businesses has been generative artificial intelligence. Just ask Tammy Franklin, owner of a small marketing firm outside of Detroit. Thanks to GenAI, she’s been able to cut down on the number of contractors she hires to write marketing materials. “I can brainstorm with ChatGPT and ask for drafts of social media posts and then edit them myself,” she says.

AI is helping small businesses automate inventory management, optimize shipping routes, and manage day-to-day business operations. In a recent survey from the U.S. Chamber of Commerce and consulting firm Teneo, 40% of small business owners said they’re using GenAI tools like chatbots and image creation, nearly double the response from the 2023 survey. “AI allows small businesses — who many times do not have the staff or resources of their competitors — to punch above their weight,” Jordan Crenshaw, senior vice president of the U.S. Chamber’s Technology Engagement Center, told the Associated Press. 

Of course, as many users have noted, GenAI still needs a human eye to check and edit its work. But according to the Small Business Entrepreneurship Council, AI tools already are saving small business owners a surprising 13 hours a week. 

Strength in Flexibility

One of the less obvious boons for small businesses may be  playing out against the backdrop of the return to office mandates. With companies like Amazon and JPMorgan Chase requiring employees to be in the office five days a week, more  workers are choosing  to venture out on their own. Gen Z,  the youngest generation in the workforce today, has prioritized work-life balance and flexibility, which bodes well for the idea of being one’s own boss.

Adam Ozimek, chief economist at the Economic Innovation Group, noted that remote work has been “One of the huge technological changes in favor of small businesses.” Newer and smaller companies are less likely to have RTO mandates, traditional human resources policies, or large offices with high rents they are looking to amortize. In fact, many smaller companies see the shift to remote work as a way to reduce overhead, allowing them to invest in other aspects of the business.   That could translate into an entirely new group of entrepreneurs and employees eager to work for a small business.

With inflation trending downward, GenAI rapidly improving, and more workers prioritizing flexibility, small business owners – and people thinking of joining those ranks – may continue to be unyielding bright spots in the economy.

 [PO1]No revenue paramaters around small businesses? If not, it’s worth noting that the description clearly includes a lot of small- and mid-cap companies.

 [MOU2]Great point, when you asked this I looked further and there are several definitions of small biz:

The one I pulled is from the Small Biz Administration, which just says the 500 number.

But the Census Bureau has a definition that’s broader: firm revenue (ranging from $1 million to over $40 million) and employment (from 100 to over 1,500 employees).

Which would you like to go with? And either way, I think your point of noting small and mid-cap is good so I tried to weave it in