Ann Marie Wiersch: Welcome to the Federal Reserve Economic Development podcast series. I'm Ann Marie Wiersch from the Federal Reserve Bank of Cleveland. During this podcast, we'll explore small business issues and conditions since the Great Recession.
Research shows that small firms have faced steeper challenges than their larger counterparts as they navigate the economic recovery. We know, for instance, that many have scaled back plans to borrow funds and have been more reluctant to expand their operations and hire new workers.
While a recent Cleveland Fed survey shows that small business owners are more optimistic about the future and expect sales to rise in the coming year, respondents cited a number of challenges that are preventing them from strengthening and growing their businesses. Their top three issues were finding the right workers, access to credit, and weaker sales, often associated with competition from larger firms. Since our results are consistent with those of other Reserve Banks surveys, it would be beneficial to investigate these issues a little more deeply. To take us on this deeper dive, I am pleased to welcome Ty Barksdale and Jake Rouch.
Ty Barksdale is head of business banking for Sutton Bank in northeast Ohio. Jake Rouch is vice president of economic development at the Erie, Pennsylvania, Regional Chamber and Growth Partnership, and brings expertise in workforce development issues. Thanks, gentlemen, for joining us.
I'd like to start with you, Ty. As a banker, you are continuously reviewing the financials of your business customers and have seen firsthand the challenges small businesses have faced coming back from the recession. Where are you still seeing the impact of weaker sales?
Ty Barksdale: Because of my position, I am continually reviewing financial information from my clients. This information spreads across numerous industries.
Over the last couple of years, I've seen most clients improve profitability, but that's not always tied to an increase in revenues. I think bankers are consistently seeing businesses that are tied to residential construction continue to struggle. Not just the builders, the suppliers, the electricians, the plumbers—the list goes on. Basically, if the business model is closely tied to construction, the business saw great years in the early 2000s, but then saw the bottom fall out during the recession and they simply have not rebounded.
Wiersch: Certainly, weaker sales impact the creditworthiness of borrowers. In what ways do you see that small businesses are still struggling with access to credit?
Barksdale: There is no doubt that weaker sales impacted the ability for small firms to borrow money. Bankers are predominantly looking at historical data as the best indicator of future performance. The big question is, "Does this business generate enough revenue to cover expenses and service its debt, and is there room to spare?" When you're looking at a loan request and a three-year period you're looking at is 2010 through 2012, there's a strong likelihood that in at least one of those years the business is going to show subpar performance.
The conundrum of all this is during the recession, businesses were not able to pay down debt and, in a lot of cases, took on more debt. And when bankers are looking at these requests today, they're in all likelihood looking at some of the worst years of a given business's performance.
Wiersch: Let's shift gears a bit to workforce challenges and get some thoughts from Jake on this issue. While we know that small businesses have been slow to add workers during this economic recovery, we've begun to see some hiring. But, even with persistently high unemployment levels, businesses report that the right workers are hard to find. In your role, where and how do you see that workforce issues are manifesting themselves for small firms?
Jake Rouch: What we've observed is that companies, smaller businesses in particular, are slower in their hiring process and they're hiring fewer people. But they're hiring people that they believe can be with them in the long run. Basically, they've recognized the value of each individual employee and they want to bring people on board that have different traits perhaps than they had in the past.
In the past, you might hire someone that had marginal skills to do the job but couldn't do much else for what that particular position was. Now we're seeing smaller businesses looking to hire people who demonstrate unique traits to the modern workplace: being adaptable, critical thinking and problem solving, the ability to collaborate, the ability to be agile and demonstrate initiative and entrepreneurialism. They've got to have good written skills and oral communication skills because they're working in a team. They've got to analyze data differently and they've got to come to the workplace with curiosity and imagination.
So we're seeing the employers take more time to hire. We're seeing them perhaps reanalyze how they're going to deploy the workforce and perhaps automate a bit more, so that they aren't as reliant on hiring bodies to get things done. And then the last piece of it is we're seeing small businesses focus in on "what's our core business" and hire people around that core business, and perhaps outsource or form a strategic alliance with somebody who has the talent already in place and does a particular niche of our business.
Wiersch: Now, surveys show that advanced math, technology, and computer skills are among the most sought after by businesses. In your experience, what roles are toughest to fill?
Rouch: Interestingly, it's both. It's entry-level and the traditional STEM-level [science, technology, engineering, and math] employees. On the entry level, what we're finding is that it doesn't matter what the business is, there's an increasing requirement to understand technology and use technology to do even the most basic jobs. And so the employees coming into the workplace may or may not have the technological sophistication to do that entry-level position. We're also seeing a consistent concern about the lack of soft skills and work ethic.
So there's a challenge. Even though there are a lot of people who feel they're qualified for that entry-level position, they're not as qualified as maybe they think they are today because the workplace is changing. Even the entry-level jobs have a higher standard or threshold that has to be hit in order for you to go to work for someone.
At the STEM level, it's a totally different challenge. When you get into engineering and professional jobs, you run into a situation where, because the demand for those positions far exceeds the supply of people in the workforce that are available and looking to come in, pay becomes a very competitive issue. For an employer, it's going to be harder to find that rare commodity.
Wiersch: What workforce programs are you seeing that are helpful, specifically, for small businesses?
Rouch: From my standpoint, the programs that work best are the ones that involve going out and helping a company become more competitive in their day in and day out business. So any type of technical assistance or growth assistance that you can provide to a business around strategic planning, identifying new markets, lean processes, those are all items that once the company has them in place and is actively utilizing them, they'll be able to replicate them into the future and consistently run a competitive and efficient operation. And smaller businesses have a tendency to not do those as well.
Wiersch: Given the importance of small businesses to local economies, how can economic development groups and local governments better support the needs of small businesses?
Rouch: My observation is a very simple thing that economic development groups and local elected officials and others can do. There needs to be some form of structured, proactive outreach to small businesses. Small businesses don't have the time to go find the programs and services that might be able to help them become more competitive or to grow their business, and every business has something that's keeping them up at night.
And so I think it's real important for those of us in the economic development world, those in local government, to factor in time to go out and be meeting with businesses to say, "What's keeping you up at night?" We can identify the programs and services to assist them to overcome that challenge. Once that happens, then, hopefully, the lines of communication between that small business and economic development and local government are open, and they're not as hesitant to pick up the phone and ask for assistance.
Barksdale: I think efforts need to be made to understand the needs of the existing small businesses within a given area. And, of course, those needs will vary based on geographic location and economic conditions. I believe development groups and local governments need to look for businesses that are ready to expand or are in need of assistance in finding qualified employees in the area and focus efforts there, at least in the short term.
Wiersch: Where and how does investment in small business pay off at the local and regional levels?
Barksdale: I think it's very difficult for most people to comprehend the trickle-down effect that investment in small businesses can have on the economy as a whole. It's a great multiplier effect—as small businesses continue to do better and add jobs, other small businesses continue to do better and add jobs, and it just goes from there.
Rouch: On a supersmall business it would be the new business start-up, which I'm calling a "hatch," and the higher the hatch rate in any market, the more vibrant that market's going to be.
So the more hatches you have in a community, those small businesses grow up over time and they feed the midsize businesses and the larger businesses. And so every community, to be successful, has to have your major employers doing well, your midsize and small businesses finding new opportunities to partner and work together and grow. And then the last component of it is you've got to have new hatches going on in the market. And if you have those three segments happening in robust manners at all levels, you're going to have a robust economy.
But if you ignore any one of them, then the economy's just not going to perform at its optimum level. They're different audiences, they require different tools to help them grow and expand, but they all deserve equal attention by those in the community trying to help it grow.
Wiersch: Thank you, Jake and Ty, for speaking with us today. This concludes our podcast. We've been speaking to Ty Barksdale of Ohio's Sutton Bank and Jake Rouch of Northwest Pennsylvania's Regional Chamber of Commerce.
In May 2014, the Federal Reserve Bank of Philadelphia will host the biannual Reinventing Older Communities Conference in Philadelphia. The conference covers key community and economic development issues impacting older cities and regions across the nation. More information about this conference will be available soon on their website. We hope you can join us.