Karen Gordon Mills served in President Barack Obama’s cabinet as head of the Small Business Administration (SBA) during the height of the Great Recession. “Back then, I thought small businesses were weathering the worst financial crisis of my lifetime,” says Mills, now a senior fellow at HBS. “But COVID-19’s impact on the sector makes 2009 look like a teeny blip.”

There are over 30 million small businesses in the United States, accounting for half of the nation’s private sector employment and the majority of job creation. Many of them—from “mom-and-pop” shops on Main Street to B2B suppliers—run with thin margins and minimal cash reserves, even in the best of times.

“When COVID-19 hit, they felt the shock immediately,” Mills explains. Beginning in March 2020, the pandemic and unprecedented public health measures began to upend the economy. A month later, a survey by researchers from Harvard University and other institutions found that 43 percent of small businesses had temporarily closed.

Immediate action was needed to support the sector. Mills, author of Fintech, Small Business & the American Dream, was active in advising policymakers in Congress and the White House on relief efforts. Beyond the $800 billion Paycheck Protection Program (PPP), these included 90 percent guarantees on SBA-backed loans, a tactic first deployed by Mills during the Great Recession.

“Early-stage cash infusions have been critical,” she notes, “but navigating the steep climb back from these historic disruptions and revenue losses will require even more transformational thinking.” Mills believes three important lessons from the pandemic can help point the way.

Fintech Reinvents Lending

The PPP’s forgivable loans were a lifeline for many small businesses. But banks often prioritized larger, established clients, while the smallest and most vulnerable businesses had trouble accessing funds. “Fintech companies really stepped up to fill that gap,” Mills says. The fintechs streamlined loan applications and used automated processing to get cash out quickly. By the program’s second round, companies such as Square, Kabbage, PayPal, and Intuit became approved PPP lenders and handled a significant share of PPP loans.

“The fintechs’ success was a wake-up call for banks to rethink their small business-focused products and broaden access to lending,” says Mills. Research suggests that fintechs were responsible for some 50 percent of PPP loans to Black-owned businesses. “As the recovery evolves, adopting new technologies will help banks get better at making sure every creditworthy small business can get a loan.”

Small Businesses Strengthen US Supply Chains

The current global supply chain back-up underscores the importance of valuing and fostering small manufacturers and service providers. Referencing her work (see below) with economist Mercedes Delgado, Mills notes, “Policymakers looking at the health of America’s supply chains shouldn’t just consider large companies, but also small innovative suppliers of both goods and services. Are they getting access to the capital, the trained workforce, and the intellectual property protection that they need?” An advocate of the business cluster concept pioneered by Michael Porter, the Bishop William Lawrence University Professor (Renewal Leave) at HBS, Mills argues that organizing a region’s small and large businesses around specialized industries—such as biotech in Greater Boston and “eds and meds” in Pittsburgh—can foster greater collaboration between small suppliers and large businesses. Cluster research shows that this, in turn, creates resilience during economic ups and downs. “Everyone benefits when large businesses treat their small suppliers as partners in growth and innovation,” Mills says.

Business Owners Get AI Tools

“The good news is that small businesses are resilient. Many of them are already using apps driven by AI and algorithms to pivot their business models,” Mills adds. In her book, she coined the term “small business utopia” to describe a product-service ecosystem that provides real-time insights into cash flow, inventories, and staffing. “Right now, small business owners have to track financials on a variety of unlinked programs and devices,” Mills explains. “But that’s on the brink of change. Dozens of companies have contacted me to say they’re developing the integrated ‘dashboards’ I envisioned in my book. These tools will be game changers in the post-pandemic economy.”

Yet technology can come with a “dark side.” In her HBS classroom, Mills challenges MBA students to consider the responsibilities of business leaders in an era when decision making is increasingly dependent on algorithms: “What happens when the algorithms make a mistake on someone’s credit score, and because of that they don’t get a loan? How do you protect against bias? How do you regulate data access and ownership? These are critical leadership questions as we emerge from the pandemic.”

Editor's note: Read more about the research exploring the supply chain economy conducted by Karen Gordon Mills and Mercedes Delgado.

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