Why are Small Businesses Closing and What Can Be Done About It?
Here at Honeycomb, we’ve been noticing a puzzling trend happening with the businesses around us in Pittsburgh, and it’s been happening across the country. Small businesses in our communities are starting to make big plans for expansion, then abruptly deciding to close their doors.
One of our team members called it a “bloodbath” and I think that’s a pretty accurate means of describing this phenomenon. This is not the usual slow death throes of small businesses that we’ve been seeing throughout the last couple of years, but rather sudden changes of already seemingly healthy businesses.
What’s happening here? Here are some thoughts as to why small businesses who have made it this far in the pandemic are still closing down, and what solutions they might take to stick around.
What kinds of businesses are closing?
There are a few defining characteristics of small businesses that are closing. Many of them are in the food and beverage or personal services industries (such as hair salons, wellness centers, etc). Also, age is a factor. A lot of young businesses that have only been around for a few years - whether started during the pandemic or just before - have been closing.
A McKinsey study shows that the businesses that have the highest risk of closing and the most affected by the pandemic are accommodations and food service, arts and entertainment, transportation and warehousing, and more. In addition, minority-owned businesses are at greater risk, as are business owners who have less education and income.
The coronavirus drastically changed consumer habits
This isn’t news, but the coronavirus has really changed the way we conduct business and the way that customers interact with small businesses. Consumers often expect more no-contact options or delivery for one.
At the start of the pandemic, we noticed a surge of people wanting to support small businesses, whether by purchasing gift cards or more frequently shopping at these shops. Where has this support gone? Is it because businesses have yet to adapt? Have tightening household budgets caused consumers to utilize small businesses less in favor of more economical options?
All this being said, small businesses have been closing even before the pandemic at an alarming rate. Annual trends indicate that 600,000 small businesses are closing a year, and the pandemic has added an extra 200,000 to that.
Small businesses are having trouble adapting to market changes
Late 2021 and early 2022 have given a whole new array of challenges to small businesses. Whiplash from coronavirus restrictions changing, worker shortages, more infectious strains of the virus crippling already small workforces, are all causing businesses to temporarily or permanently close their doors.
One would expect a “thaw” to take place both literally as winter turns to spring and figuratively as coronavirus cases go down and mask restrictions soften, but as we witnessed last summer and fall, novel variants cause small businesses to revert right back to restrictive practices in order to be safe.
There’s a disconnect between the consumer expectations we’ve mentioned before and the realities of businesses right now. With the amount of people who have exited the labor force, many small businesses can’t operate at the capacity that their customers are used to, which can hurt their business down the line.
Undercapitalization is causing new and growing small businesses to close or shrink
Another major factor in the closing of these businesses - especially those who appear to be doing really well and wanting to expand - is the fact that they simply can’t find the funding to expand, and in some cases continue to function. Undercapitalization is one of the biggest reasons why small businesses fail.
This is partly because of economic factors - small business lending has been steadily declining thanks to consolidation of banks, the decline of relationship banking, and risk-averse lending policies.
To stay afloat, small business owners need easier access to capital to grow and maintain their businesses, especially during times of uncertainty and hardship like now. This is why Honeycomb Credit exists - we want to give small businesses every opportunity to access financing for their business and bring their community into the process with crowdfunded small business loans.
Small businesses are too important to close
Join us in our mission to keep our Main Streets vibrant and economically empowered. If your small business is having a hard time finding funding from a bank, you’re not alone. Learn more about how you can access small business financing from your community by filling out the form below!