Capital Requirements Bottleneck Small Business Formation

They say necessity is the mother of invention, but what they don’t say in the same breath is that you can need something all you want, but to actually fulfill that need requires a minimum amount of resources.

And not only that but there needs to be a low enough fear of not being able to meet one’s most basic needs in the future so that investing resources in the present isn’t seen as being too risky in light of the unknown future. That’s not as catchy though is it? But it’s true.

We just witnessed a very large demonstration of that self-evident truth in the form of the monthly child tax credit as tens of millions of parents experienced six months of increased access to resources along with a decreased sense of economic insecurity.

“The CTC has helped expand our country’s small business ecosystem and is allowing more Americans to realize their entrepreneurial goals.”

Representatives for Small Business Majority, Main Street Alliance, and the American Sustainable Business Network in a letter to Congress

After three months of the guaranteed monthly payments, the number of parents with incomes under $50,000 describing themselves as self-employed increased by 22%. After just the first month, the payments had lifted in-store retail sales by 15.5%, exceeding even pre-pandemic levels.

Observations like these prompted Small Business Majority, Main Street Alliance, and American Sustainable Business Network to send a letter to Congressional leaders underscoring their support of the monthly CTC as being beneficial to America’s entrepreneurs. The letter concluded by stating, “The CTC has helped expand our country’s small business ecosystem and is allowing more Americans to realize their entrepreneurial goals.”

The Data is In

A national survey of 1,259 small business owners also found strong support for the monthly CTC. 61% of those surveyed were in favor of the payments. 59% of them said the payments were enabling parents to spend more money to the benefit of Main Street small businesses. 62% of them believed that the payments were enabling more people to afford child care which was benefitting small businesses. And 23% of them were themselves receiving CTC checks which personally helped them as entrepreneurs to have a bit more stability in their lives.

Entrepreneurs know that when other people have money to spend, it’s good for them too, because it’s good for their businesses. Entrepreneurs also know that starting and running a business involves a leap of faith and a bit of capital. It’s not that entrepreneurs are a special kind of people. It’s that not everyone has the access to capital to start a business, and too many people feel that the risks of failure are too great for their own personal safety and the safety of their families. When poverty can kill, failure can kill, and when failure can kill, good ideas go untried.

It’s no coincidence that during the pandemic, entrepreneurship increased in the United States by 23%, which was more than any other advanced economy. We’re the country that sent out stimulus checks to almost everyone in our economy. When millions of Americans lost their jobs and started receiving boosted unemployment checks, they didn’t sit around doing anything. They got creative and used the capital and increased financial security provided to them in the form of government checks to launch new endeavors and adapt to the coronavirus-impacted landscape.

This stuff isn’t anything new either. It’s simply reinforcing what we’ve already long known. Our food assistance program is known to increase entrepreneurship simply by existing. Even when someone isn’t actively using it, the fact that would-be entrepreneurs believe it will be there for them should they fail results in more people becoming entrepreneurs.

Specifically, it was found that the expansion of SNAP in some states and not others increased the chance within those states that newly eligible households would own an incorporated business by 16% compared to the states that didn’t expand SNAP. There’s also something much closer to the monthly CTC than SNAP to look at, and that’s Canada’s virtually identical version of our enhanced CTC that they call the Canada Child Benefit or CCB.

Their CCB has existed in its current form since 2016 and as a direct result of it, there’s been over $256 billion in new revenue for Canadian businesses, and all that money flowing to parents in Canada has caused more than $27 billion in private capital investments. With a GDP of $1.7 trillion, that’s a healthy economic boost the CCB is providing to entrepreneurs and their customers. It’s been estimated that without the CCB payments flowing to Canadian parents, Canada’s economy would be at least $46 billion smaller every year, which would be about a 3% annual hit to their GDP.

Job Creation Starts With Financial Security For Entrepreneurs

Entrepreneurial parents in America are already personally feeling such a hit with the expiration of their monthly CTC. In an interview with the Daily Caller, a couple by the name of Brian and Megan Curtis described how the loss of the CTC payments, which had felt like “a rebirth of the American Dream,” forced them to pull back on the telehealth business they’d recently launched together.

The CTC had allowed them to devote more resources towards growing their business without having to worry as much, and when those payments stopped, it meant fewer resources and more worry, and that combo is poison for entrepreneurship. Brian and Megan of course aren’t alone either.

Small Businesses Need Community Support to Survive

As reported in the New York Times, a couple by the name of Blayne and Kayla Midthun whose ice cream parlor business was greatly impacted by the pandemic were able to use the CTC to put money straight back into their business. How good is it for their business, and their family that their business supports, to stop receiving that extra stabilizing $750 a month? And how good is it for many of their customers to take a monthly hit to their own incomes as fellow parents newly less able to afford the luxury of a special treat like an ice cream sundae for their own kids?

Goldman Sachs considered questions like that and decided to downgrade their estimate of 2022 US GDP as a result of the answers. With American families hit by higher taxes and thus less disposable income as a result of the lapse of the enhanced child tax credit, expected GDP growth in Q1 was cut by a third. Fewer customers are bad for a consumer-based economy.

Entrepreneurs need to be more than surviving every month. They need more than that to invest in their businesses.

Scott Santens

Negative Impacts of the Loss of Month CTC

The negative impacts of the loss of the monthly CTC payments on America’s small businesses also aren’t equally distributed. Families in rural America, and thus Main Street USA local economies, were the ones being disproportionately boosted by the enhanced CTC. 49% of rural children were newly getting a boost from the checks compared to 39% of metro children.

The Niskanen Center similarly estimated a 1.35% boost to rural area GDP. In Idaho, the enhanced CTC was estimated as already responsible for 1.8% of its GDP, and thus with its loss, a 1.8% decline is fair to expect. A 1.8% loss is also expected in Mississippi and a 1.6% loss in Arkansas and Montana. These are entirely unnecessary losses of economic activity.

Small businesses are the heart and soul of the US economy. They create two-thirds of net new jobs and account for 44% of our GDP. However, this has actually been shrinking. In 1998, they accounted for 48% of GDP. Consider what has happened since wages decoupled from productivity, and for a great many Americans, their discretionary purchasing power fell. As the American consumer has needed to focus on spending less instead of spending locally, consumers moved from Main Streets to Walmart and Amazon.

Helping American Small Businesses Thrive and Survive

When what matters most is the lowest price, buying locally simply isn’t as important. I think we just witnessed a temporary alleviation of that thanks to the CTC payments, where parents became a bit freer to focus a bit less on price and a bit more on other factors like local impacts and sustainability. The American small business economy can’t thrive so long as the American consumer is just trying to survive month-to-month. Small businesses need customers with money to spend after they pay the bills.

Consumers aren’t the only ones that need to be free of thinking only about their basic survival needs. Entrepreneurs need to feel free to take risks without fearing for the lives of their families should they fail. Entrepreneurs need to be more than just surviving every month. They need more than that to invest in their businesses. They need someone to believe in them.

In what is considered to be perhaps “the most effective development program in history,” Nigeria handed out cash grants to would-be entrepreneurs. 1,200 of them got $50,000 each. After three years, 93% of recipients had a company up and running versus 54% of would-be entrepreneurs who didn’t receive the cash grant. Three times as many of the companies were also bigger than those of the control group.

The Impact on Monthly Income on Entrepreneurship

Think about just how many small businesses don’t exist simply because their would-be founders lack the capital to start them. The enhanced CTC wasn’t $50,000, but it was an investment in entrepreneurial parents, many of whom were already beginning to create new small businesses at a faster rate thanks to that cash investment.

When I think about the impact of monthly no-strings income on entrepreneurship, I always think about a woman named Frieda Nembwaya who was living in a village in Namibia when everyone in her village started receiving a monthly unconditional cash grant. With her very first payment, she went out and bought baking ingredients, built a makeshift stove, and started baking small loaves of bread for the residents of her village. Her new business took off and she ended up earning far more from her bakery business than the cash payments she continued to receive that made it all possible.

The Financial Health of Consumers is Key

Think for a moment about what was responsible for her success. Was it Frieda alone who had a good idea and the work ethic to build a successful business? Well, here’s a thought experiment. Imagine it wasn’t monthly cash that she was receiving but a loan. She would have still been able to start her business using that money, but would her business have been successful in a village where no one had any money to buy her bread?

Small businesses are job creators, but they don’t do it alone out of thin air. The true job creators are the customers whose spending enables businesses to succeed.

Scott Santens

What made Frieda’s business success wasn’t Frieda alone. It was the fact her village suddenly became full of people with money to spend, and it was Frieda who offered them a great product that they were actually able to buy, which allowed her to continue making more.

The True Potential of a Monthly Tax Credit

It’s this dynamic that we just witnessed here in the US with the CTC payments. Because parents had a bit more money to spend, parents with businesses had a bit more customers. That enabled more businesses to succeed, prevented some businesses from failing, and enabled some new businesses to be created. That’s the true potential of a monthly child tax credit.

Small businesses are job creators, but they don’t do it alone out of thin air. The true job creators are the customers whose spending enables businesses to succeed. We seem to have forgotten that over the past few decades of stagnant wages, but the monthly child tax credit is a reminder of how we can turn things around for small businesses by recentering the importance of people having money to spend, and also the importance of would-be entrepreneurs feeling less afraid of the consequences of failure.

We should restore the monthly child tax credit, and we should do it not only to see a lot more kids free of poverty but to recognize that we’ll see a lot more entrepreneurs too. The money isn’t just money. It’s a message to entrepreneurial parents that says, “America believes in you.” We need to start sending that message every month again.