After Enduring a Pandemic, Small Businesses Face New Worries

America’s small businesses can’t catch a break.

After two years of shutdowns and restrictions due to the Covid-19 pandemic, they’re straining to keep up with price increases without losing customers to larger competitors. They are struggling to keep positions filled as competition for workers remains at a fever pitch. And just at the moment that many business owners begin to recover and shore up their depleted savings, they’re worried that the Federal Reserve’s medicine for inflation will bring fresh hardship: higher borrowing costs and timid consumers.

Surveys show that small-business sentiment has taken a markedly pessimistic turn in recent months — even more so than that of professional forecasters and of corporate executives.

In June, the National Federation of Independent Business measured its lowest reading ever for economic expectations. The nonprofit Small Business Majority, in a survey in mid-July, found that nearly one in three small businesses couldn’t survive for more than three months without additional capital or a change in business conditions. The U.S. Chamber of Commerce’s Small Business Index for the second quarter showed that inflation had skyrocketed to the top of owners’ concerns. Seventy-five percent of participants in Goldman Sachs’s small-business coaching program reported that higher costs had impaired their finances.

The sector — which the federal government typically defines as businesses below a certain size, ranging from 500 to 1,500 employees depending on the industry — is responsible for two of every three jobs created over the past 25 years, according to the Labor Department. So a weakening of that engine bodes ill for American growth and prosperity.

Corinne Hodges runs the Association of Women’s Business Centers, a national network offering training, mentoring and financing to entrepreneurs. The organization’s funding from the Small Business Administration was augmented to help thousands of businesses navigate the pandemic, but, with the extra money now exhausted, the centers are laying off advisers, just as clients are asking for more help.

“We saw pivoting in Covid,” Ms. Hodges said. “Well, what is it now? What’s the new pivot? It’s just been a vise grip of pressure emerging from the pandemic. Is a pivot going to be enough, or does it need to be something more?”

Kymme Williams-Davis was one of those who survived pivot after pivot, and she isn’t sure she can make it much longer.

Seven years ago, she started a coffee shop in Brooklyn called Bushwick Grind, specializing in fair-trade beans that are locally roasted. She spent $200,000 building out the space with a kitchen, and developed a brisk business selling healthier fare than that of the fast food outlets around her.

When the pandemic hit, the shop had to close for nine months. Ms. Williams-Davis made rent by subletting the space to other small vendors. When she reopened in 2021, she got a boost from a contract to deliver 400 meals a day to the city’s vaccine sites. That cash flow allowed her to qualify for a loan to buy her own space.

But she hasn’t been able to find anything in Brooklyn, in part because large investors keep outbidding her. Foot traffic hasn’t recovered. The cost of coffee, kale and other provisions — if she can even get them — is skyrocketing. Farmers from upstate are saving on gas by taking fewer trips into the city, so she has begun to swap in lower-grade ingredients.

8 Signs That the Economy Is Losing Steam

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Worrying outlook. Amid persistently high inflation, rising consumer prices and declining spending, the American economy is showing clear signs of slowing down, fueling concerns about a potential recession. Here are other eight measures signaling trouble ahead:

Retail sales. The latest report from the Commerce Department showed that retail sales fell 0.3 percent in May, and rose less in April than initially believed.

Consumer confidence. In June, the University of Michigan’s survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.

The housing market. Demand for real estate has decreased, and construction of new homes is slowing. These trends could continue as interest rates rise, and real estate companies, including Compass and Redfin, have laid off employees in anticipation of a downturn in the housing market.

Start-up funding. Investments in start-ups have declined to their lowest level since 2019, dropping 23 percent over the last three months, to $62.3 billion.

The stock market. The S&P 500 had its worst first half of a year since 1970, and it is down nearly 19 percent since January. Every sector of the index beyond energy is down from the beginning of the year.

Copper. A commodity seen by analysts as a measure of sentiment about the global economy — because of its widespread use in buildings, cars and other products — copper is down more than 20 percent since January, hitting a 17-month low on July 1.

Oil. Crude prices are up this year, in part because of supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to waver as investors worry about growth.

The bond market. Long-term interest rates in government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield-curve inversion. It suggests that bond investors are expecting an economic slowdown.

“The costs are so high, the revenue came in, but it’s just siphoning out,” Ms. Williams-Davis said. At the same time, an unstable work force has made it difficult to operate full steam: She had to limit her offerings, eliminating a brunch menu, because cooks kept leaving. Even after she raised starting pay to $24 an hour, she said, employees were lured away by the flexibility of gig work.

Ms. Williams-Davis doesn’t blame her workers for seeking better opportunities, but the trend is one more penny on the scale against survival. Asked about the future, she sighed. “I feel like it’s 50-50,” she said, “because if I don’t find a way to reduce my liability and retain capital, I won’t be able to make it too much longer.”

Instability in the work force has made it difficult for the shop to operate at full steam.Credit…Lanna Apisukh for The New York Times

The past two and a half years have been harder on small businesses than on larger ones. A new paper using tax data from California shows that through the fall of 2020, smaller businesses there closed at a significantly higher rate than large ones, increasing the degree of market dominance by larger firms in the state.

At the same time, a wave of people started businesses in 2020 and 2021 — some prompted by layoffs, others seizing opportunities born of the pandemic. While that wave appears to have crested, according to the Census Bureau, corporate registrations remain above prepandemic levels.

The latest challenge raises the question of whether that dynamism, a welcome development after a sluggish decade following the financial crisis of 2008, can be sustained.

Operations that arose from the pandemic had advantages: no business practices to upend, or legacy costs like office leases to carry. Many businesses were built around remote operating environments and sanitary precautions. But they weren’t any more ready than existing businesses for soaring inflation and rising interest rates. And, unlike established enterprises, they didn’t have access to most relief programs offered by the federal government.

Irina Sirotkina sold her stake in a construction company early in the pandemic, when contracts for new hotels and office buildings dried up. She used that money to open a bakery in October in Battle Ground, Wash. Although orders for her cakes and pies have been pouring in, customers have resisted even the smallest price increases. The costs of her main ingredients — eggs, butter, milk and flour — have climbed 13 to 49 percent since she first fired up the ovens. So far, profits have been elusive, would-be customers are cutting down on car trips into town and there’s no new Paycheck Protection Program in sight.

Understand Inflation and How It Impacts You

  • Inflation 101: What’s driving inflation in the United States? What can slow the rapid price gains? Here’s what to know.
  • Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.
  • Managing Your Finances: With interest rates rising, now is a good time to pay down credit card balances and bolster emergency savings.
  • Changing Behaviors: From driving fewer miles to downgrading vacations, Americans are making changes to their spending because of inflation. Here’s how five households are coping.

“We’ve used all our resources to make it, because we didn’t qualify the first, second or third round” of that program, Ms. Sirotkina said. “But how far are we going to have to make it before we get help?”

New businesses and those run by people of color have particular difficulty obtaining bank loans, so they’re often driven to online lenders that charge steep interest rates for short-term financing. Last year, hoping to ease access to credit, Congress allocated $10 billion to be funneled through lenders with the express purpose of reaching underserved entrepreneurs; the money is still trickling out.

Nevertheless, signs of weakness are appearing. Gusto, a payroll and benefits provider that serves 200,000 small businesses, has seen an uptick in layoffs among its users. That’s significant, said the company’s economist, Luke Pardue, because smaller employers are typically loath to let people go.

“For a small business, 10 percent of its work force might be its H.R. department,” Dr. Pardue said. “Every employee really does have some specialized importance that might not be present in a larger company, so every swing you might see is more meaningful.”

To prevent further losses, small-business advocates want congressional action to streamline the Small Business Administration’s loan programs and make them available to more types of businesses. Deferring payments on S.B.A. loans issued during the pandemic could help, as could redoubling efforts to increase the number of small businesses that receive government contracts, which has shrunk over the past decade.

But one policymaker that advocates probably won’t be able to sway is the Federal Reserve.

At a conference last week outside Washington, Goldman Sachs brought together 2,500 small businesses that had gone through the bank’s development program. In a packed breakout session, Goldman’s chief U.S. economist, David Mericle, delivered a presentation on the state of the economy, explaining that the Fed is willing to risk a recession by raising interest rates to bring prices back in check.

Joan Escover, who has run a printing company in Santa Clara, Calif., for 25 years, stood in the back, worrying. Her business took a big hit during the pandemic as trade shows collapsed, and she maxed out every relief program she could. A low-interest S.B.A. loan had been crucial to her recovery, and pricey credit would make everything more difficult.

She raised her hand. “Why are they using interest rates as a tactic?” she asked. Mr. Mericle answered, sympathetically, that the Fed worried that, without steps to cool off demand, high prices would become entrenched in a self-perpetuating cycle.

After the session, Ms. Escover explained that while business was improving — an election year brings lots of orders for signs — she needed to invest in new equipment to keep up with her larger competitors.

“I have an aging work force, so I have to have increased productivity,” Ms. Escover said. “If I can’t buy that new paper cutter that costs $200,000, how are you going to do that?”

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