With no silver bullet, here’s how small businesses can bounce back

by Rocco Rossi, Claudia Dessanti. Originally published on Policy Options
December 18, 2020

The impact COVID-19 has had on Canada’s small businesses is nothing short of tragic. While springtime was difficult enough, the second wave and the restrictions that followed visibly transformed communities where case counts rose rapidly. Filling the vacuum these businesses left behind will be one of the biggest feats of economic recovery.

What will it take?

Government must be willing to take risks – albeit calculated ones – to address liquidity constraints for small businesses, modernize regulation, and ultimately propel entrepreneurship.

Even before the holiday season, it was apparent that many small businesses would not survive this crisis. In Ontario, which accounts for nearly two-fifths of Canada’s economic activity, 55 per cent of small businesses shrank between June and November, according to the Ontario Chamber of Commerce.

We saw this coming, as 23 per cent of small businesses nationwide said they were not financially prepared for a second wave, and 43 per cent of small businesses said they could not afford to take on additional debt, according to the Canadian Survey on Business Conditions. While large businesses were not immune to the fallout, smaller firms generally have less room to manoeuvre on their balance sheets.

Their hardship was compounded by the timing of second-wave lockdowns, which forced many retailers to shut their doors ahead of the holiday season that normally brings in an outsized share of their revenue.

Consumers tried to stem the bleeding. In November, 61 per cent of Ontarians said they were making an effort to buy more from local businesses, according to unpublished data from Angus Reid data. Business associations and politicians urged holiday shoppers to support smaller retailers. This has helped, as have the government programs offered to employers.

Unfortunately, it has not been enough. For some business owners, the pandemic has erased years of investment, and often their retirement plans, too. This has a ripple effect: small businesses account for 66 per cent of all Canadian jobs and contribute immensely to regional economies.

The big question post-pandemic is how small business will rebuild itself. The answer to this will depend in part on whether governments lay the appropriate groundwork for a rebound.

They should take a two-pronged approach.

First, policy-makers should enhance supports for entrepreneurs. Creativity and grit alone are not enough to guarantee entrepreneurs’ success; they also need capital, mentorship, digital literacy, and access to markets.

When it comes to financing, small businesses can access everything from traditional loans to government grants. As the crisis subsides, many will need new capital to launch, restructure, and grow. As credit losses remain elevated, lenders will take a more conservative approach to risk, and more debt is not always the best option for entrepreneurs.

Governments can bolster access to capital through loan guarantees and program expansions, but they should also work with the lenders and investors to develop creative solutions. For example, a regulatory sandbox is a program that allows eligible financial firms to experiment with innovative products and services under the supervision of a regulator, but without the usual restrictions. For businesses, a sandbox approach could mean access to new debt and equity financing arrangements tailored to their needs.

Beyond financing, they should promote and invest in organizations that support small businesses, particularly those run by women, Indigenous people, and other under-represented groups whose ability to engage in entrepreneurship will be integral to Canada’s long-term economic and social well-being.

Second, governments must continue to modernize regulation. Burdensome red tape makes it difficult for small businesses to channel their limited resources toward innovation and growth. There is a need to distinguish between essential regulations that keep people safe and rules that are no longer suited to today’s realities, including outdated waste audits and restrictions against the use of secure e-signatures on financial documents.

The pandemic brought some relief. Ontario, for example, began allowing restaurants to deliver alcohol online and eventually made this permanent. Similar flexibility should be granted to other sectors, such as cannabis, where allowing all legal retailers, not just the government-run Ontario Cannabis Store, to sell to customers online and offer delivery and curbside pickup, would help them serve their customers and stay competitive. The temporary exemption that has allowed this during the pandemic should be made permanent.

Again, this is an opportunity to think outside the box. Beyond simply cutting red tape, Canada’s governments should embrace regulatory innovation. Other countries – such as the United Kingdom and France – are using technology to better manage compliance and adopt risk-based models that make regulation more efficient from the beginning.

Harmonization of federal, provincial, and territorial rules is another opportunity to help small businesses grow while keeping Canadian safe. Currently, employers’ ability to operate their businesses across borders and access talent are hindered by differences in interprovincial rules around certification, environment, worker and building safety, transportation, securities, professional certification, agri-food marketing, food safety, and more.

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During the period that follows this recession, the need and propensity for entrepreneurship will both be at their peak. There is plenty government can do to enable its rebound.

This article first appeared on Policy Options and is republished here under a Creative Commons license.