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The COVID Pandemic is Pushing Small Business Workers Deeper Into Debt—Here’s How To Help Change That

Luke Pardue Economist, Gusto 

Financial stability has become the new American dream. It’s a dream that is not easily achieved as almost three-quarters of Americans were already suffering from financial insecurity and stress pre-pandemic, with eight out of 10 Americans living paycheck to paycheck. 

The resurgent pandemic has put financial health even further out of reach for many small business workers, which comprise nearly half of the US workforce. Significant losses in revenue have forced businesses to reduce hours, wages, and health care benefits. COVID—and these reductions—have led to increased employee debt, confirmed by a new data report out today.  

A study by Gusto of 530 small business workers shows employees have taken on an average of $3,351 in new debt as a result of the pandemic. Furthermore, the rise in new debt is almost 3 times higher among those who saw a 10% or greater drop in income; these workers have taken on a staggering $8,891 in new debt. 

Among small business workers, the financial strain is not felt equally. Women are bearing the brunt of it, with 19.4% of women workers reporting that they have less than $400 to spend before incurring debt compared to 12% of male workers. 

The study, which examined the impact of the pandemic on small business workers’ financial health, also detailed where small business workers were turning to cope with financial strain:

  • Credit cards: Nearly 2x more workers started to carry balance on credit cards 
  • Late payments: 2.5x more delayed late rent, utility, and loan payments 
  • Payday loans: The rate of workers taking out payday loans tripled as a result of the pandemic

The rise in workers turning to payday loans is particularly alarming. Payday lenders have a history of trapping people in debt. That’s because they tend to charge sky-high APR, creating a need for borrowers to take on repeated loans and more high fees. 

Employers want to help. A happy, healthy, and financially stable team is at the center of a successful business. But the pandemic has made it near-impossible to guarantee a paycheck, let alone contribute to their workers’ financial health.  

So what can be done to stop the spiraling debt and then ensure there are pathways to long-lasting financial stability for small business workers? How do we make the American dream of financial stability achievable? Here are three changes that can help. 

Better designed, better timed federal aid

Step one to helping workers avoid long-term debt is ensuring a consistent paycheck. As we enter a second round of stimulus with the benefit of hindsight, we need to do better.

With the Paycheck Protection Program (PPP) in particular, we know what happens when the PPP funds expire—any jobs the loan saved quickly disappear. Let’s not repeat our mistakes and lose another 900,000 small business jobs.

We need to revise the PPP in a way that ensures the right amount of money gets into the hands of the small business owners who need it most—and quickly so they can keep their workers employed and paid.

Create incentives for short-term savings

Savings is the key to slowing down the compounding debt cycles that plague tens of millions of American workers. But how can anyone build long-term savings for tomorrow if they can’t build short-term savings today?

There are economic incentives for long-term savings, like 401(k) programs, but virtually none exist for short-term savings to navigate emergencies. Just like employers are incentivized to match long-term savings options for their employees via tax incentives, there should be tax tax incentives for employers to match funds when employees set money aside in their savings accounts. This will enable workers to be better prepared to handle emergencies without being forced to pursue predatory lending and banking solutions including high APR loans and overdraft fees, or make late payments that hurt their credit scores. There is no need to save for the rainy day 10 years from now if you’re currently drowning in debt.

Payroll companies should provide early access to earned wages—for free and transparently 

The demand for financial solutions that meet workers’ needs is increasing as they struggle to cope with economic hardships. Data shows workers are turning to means that risk putting them into further debt. Payroll companies can and should help by providing early access to earned wages for free and transparently. And this service should be combined with tools that make it easier to build savings. 

The pandemic laid bare how distant a reality financial health has become—and exacerbated the problem. Financial security shouldn’t be the American dream; it should be the reality. It’s time to finally make it one.

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Updated: July 27, 2021

Luke Pardue
Luke Pardue Luke Pardue is an Economist at Gusto, researching how public policies help small businesses and their workers thrive. He is a PhD Candidate in Economics at the University of Maryland, where he studies the effects of government programs on disadvantaged populations’ housing and labor market outcomes. Luke currently lives in Washington, D.C.

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