Small businesses are facing permanent closings. Helen H. Richardson/The Denver Post (Photo By … [+]
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If the lending pipeline can’t be rapidly unclogged and if income can’t get into consumers’ pockets to create demand, we should expect to see a lot of small businesses close, many of them soon and many of them permanently.
As the economic damage from the COVID pandemic and public health measures gathers speed, will the measures put in place to help small businesses be enough? Today, the answer is no. A new economics survey published at the National Bureau of Economic Research says prolonged economic hardship could see deep declines in small firms. If the economic crisis lasts six months, less than 40 percent of small business survey respondents still expect to be open at year’s end.
Of course, a six month crisis is a potential –but not impossible—worst case. A short “V-shaped” recession with rapid economic turnaround would cause less, although still significant, damage. And the collapsing economy already has hit small firms. The U.S. Chamber of Commerce reports that 25% have already closed, and 40% of those now open expect to close, at least temporarily, by mid-April.
There is no question we are entering a deep and sharp recession, unfamiliar to economists. Unemployment claims skyrocketed by over 16 million in the past three weeks, an average of over 5 million; the previous postwar weekly high was 695,000 in October 1982. Forecasters keep revising their predictions downward, with some now seeing an up to 40% drop in second quarter GDP.
But isn’t the government providing massive support to small businesses? The CARES Act included $349 billion in the Paycheck Protection Act, providing forgivable loans up to $10 million for small businesses who pledge to spend at least 75% of the proceeds on payroll.
But the loan funds aren’t flowing. The Small Business Administration (SBA), and the banks who actually make the loans, are overwhelmed with demand. Consider that the SBA usually makes around 1000 loans annually. They currently have over 250,000 applications for these special loans.
Most analysts think the $349 billion isn’t enough, and Congress wants to add another $250 billion to the pot. But a fierce legislative battle has broken out, with Democrats insisting on adding funding for state and local governments, along with hospitals, and Republicans in the Senate refusing that step. And just adding more loan money will not resolve the administrative roadblocks slowing disbursement of the current funds.
The new survey found support among small businesses for the CARES lending program. 72 percent of the responding firms said they are interested in a forgivable loan, and that it would significantly improve their ability to keep people employed and stay profitable.
But the administrative delays may prove fatal to many small businesses. Small businesses are cash-flow operations, and 50 percent of the surveyed firms said they had two months or less of cash on January 31. As the survey authors note, “These limited levels of cash on hand readily explain why layoffs and shutdowns have been so prevalent.” And although supply-chain and employee health are having negative effects, the biggest problem the firms face is simply lack of demand, cited by 78 percent of them.
Projected damage varies by industry. Overall, 38% of the small firms think they would still be open after a six-month crisis, but that drops to 27% for tourism and lodging firms, and only a 15% survival rate for restaurants. And, as the authors note, entrepreneurs are notoriously optimistic, so “true survival rates may be even lower.”
From a macroeconomic standpoint, the rapidity of closings is the biggest problem. Normally, around a third of small firms with employees fail in their first two years, and only about 50% survive for five years. But the pandemic crisis is compressing these closures into a very short time, which in turn drives down overall economic demand, in a negative spiral.
President Trump, himself a famously optimistic businessman who went through several bankruptcies, has seemed less worried about gloomy forecasts. Asked about restaurants that are closing, he said “they’ll all come back in one form of another…It may not be the same restaurant, it may not be the same ownership, but they’ll all be back.”
But the survey paints a more somber picture. If the lending pipeline can’t be rapidly unclogged and if income can’t get into consumers’ pockets to create demand, we should expect to see a lot of small businesses close, many of them soon and many of them permanently. That will make any economic recovery or “return to normalcy” much harder.