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Small Businesses Could Vanish During Coronavirus Pandemic

As states take stronger, broader measures to contain the coronavirus, economists warn that time is running out to save America’s small business community.
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The Small Business Administration lists approximately 30 million small businesses spread across the United States. Collectively they employ almost 59 million people. By the end of June, up to half of them might be gone.

Across the country, state governments have taken actions to legally enforce “social distancing,” in order to slow the spread of the coronavirus pandemic. This has ranged from Michigan’s “Stay Home, Stay Safe” executive order to New York’s economic “pause” and Massachusetts’ 30 day closure of all dine-in bars and restaurants. (Note – Shortly after the time of writing, Massachusetts governor Charlie Baker upgraded this order to close all non-essential businesses until April 7.)

While lawyers question the legality of these measures, specifically coercive actions like Michigan’s, they have drawn little protest from the public at large. Yet many, if not most, small businesses say they don’t have the resources to survive this kind of quarantine. State governments have moved quickly, shutting down their business communities in a matter of weeks. Yet the government has not moved equally quickly to protect those shops, service providers and restaurants.

At the time of writing, neither state nor federal governments have issued any significant relief to help businesses survive the ongoing quarantines, nor passed any major laws suspending debt and other obligations. (Readers should note the well-publicized moratoriums on eviction do not suspend rent collections. They merely defer those payments to a later date.)

Instead, business owners are burning through their savings in order to survive, often reaching into their personal pockets to keep up with payments. Even that won’t last long though. While some have already begun to close, analysts say that without a major rescue effort communities should expect a wave of permanent closures in the very near future.

“Imagine you run a little café,” said Brad Plothow, Vice President of Communications with the software and data firm Womply. “You have the overhead of rent, it’s not like an online business where you pay for a domain. You actually pay for a physical building. You have all of your utilities you have to pay, you have your employees. You have the city you have to pay for. It’s a lot of fixed costs.”

“It’s week by week,” He said. “It’s day by day. [One] in 5 small businesses has less than 30 days before they shut down. Some of them are living literally day by day before they close. You’re going to start to see businesses close every day.”

Plothow is not speaking figuratively.

According to a widely cited 2016 study by JP Morgan Chase, half of all small businesses have enough cash on hand to survive for only 27 days without new money coming in the door. The bar and restaurant industry tends to be particularly vulnerable. The average small service business has enough money on hand to survive just 19 days without any income. 

Brick-and-mortar businesses like restaurants tend to particularly struggle when it comes to saving up this kind of so-called buffer capital because they generally have to maintain high overhead costs. Rent, debt, fixtures, taxes, payroll, service contracts, utilities, insurance and more all add up to a monthly overhead budget that is very difficult to scale back during difficult times. While a business can take drastic steps, like laying off staff and physically turning off the lights, most of its bills still have to be paid.

Large companies have resources to cover those expenses during a downturn. Major retail and restaurant chains build cash by taking advantage of efficiencies of scale to outperform their smaller competitors, giving them the reserves to survive a recession. They also have access to better lending options than a local operation, making it easier and cheaper to get cash to pay their bills during the quarantine.

For small businesses, without the cash reserves or easy lending of a wealthy corporation, there is no such thing as taking a “pause.” The government has asked business owners to shut down for several weeks while doctors get the coronavirus under control. Experts say that’s longer than the average local flower shop, bookstore or neighborhood deli has. When a business with 19 days of cash on hand is ordered to close for 30, there’s little chance it will ever reopen.

“It’s impossible to suggest shares of enterprises that will succumb, but there’s no doubt that this will bring permanent, long-term changes in the small-business economy,” said Mark Muro, Senior Fellow with the Brookings Institute’s Metropolitan Policy Program.

“Some businesses may snap right back. But there are no guarantees, and I think there could be a genuine, deep, reorientation towards higher tech, less people-intensive businesses,” Muro continued. “Cash flows, debt, and high-fixed costs, with little ability to scale down and up, will be punished. And again, businesses without a strong digital presence or ways of operating could be endangered.”

“In any event, it’s a scary time.”

While many experts are reluctant to speculate on a precise number, neighborhoods around the country have already begun to see “For Lease” signs appear in local windows. Womply’s data suggests that more businesses will begin to close, much more quickly, very soon.

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“We tracked card transaction data for millions of small businesses,” Plothow said. “We’re seeing, for the last week, transportation businesses are down 87 percent in revenue. Arts and entertainment are down 67 percent… Restaurants are down almost 60 percent, and bars are down the same.”

Based on this data, Plothow estimates that approximately 21 percent of all American small businesses will fail within 30 days of being quarantined. Half of them will close permanently in less than three months.

The economic fallout of killing millions of small businesses around the country will magnify what is already becoming the worst recession in living memory. Not only will this delete the 30 million jobs created by those small shops, restaurants and service providers, but it will also wipe out the downstream jobs that depend on them. Many are reporting that this process has already begun. During interviews with Boston area businesses, this reporter spoke with several shop owners who described mass layoffs among delivery drivers who no longer have routes, linen services that lost all of their clients over the course of three days, and food suppliers desperate to unload products that have begun rotting on the shelves.

Once those businesses vanish, they will not come back quickly. It will take years to rebuild their economic and cultural presence. Debt burdened entrepreneurs will struggle to start new enterprises if they even try at all, and large companies will move to occupy the space that those shops and restaurants used to fill. This has already begun in most U.S. cities, with delivery services such as Amazon Prime seamlessly taking over for the shopping that many residents once conducted at their corner store.

“Once,” in this case, meaning three weeks ago.

“It doesn’t sound utterly implausible,” said Josh Bivens, Research Director with the Economic Policy Institute, speaking of a 50 percent closure rate for small businesses. “For one, the economic shock coming over the next 3 months is just staggering and unprecedented. For another, most small businesses are on close to a knife’s edge in most times to stay afloat.”

However, like many of his colleagues, Bivens also sees a reason for hope. The survival of small businesses, he argues, will largely turn on how Congress chooses to act in the coming days. Quick, vast and well-targeted relief could save this community from the worst of the recession.

“Failure is very policy-dependent,” Bivens said. “If the federal government manages to stand up zero-interest, no-penalty loans, and if they manage to stand-up programs to allow furloughed workers or workers with hours reductions to get substantial UI assistance, this could remove payroll costs from small businesses without having them totally shed their workforce, potentially allowing them to hang on during the downturn.”

“And,” he added, “if enough targeted stimulus is provided once the public health “all clear” is sounded, the bounceback could be quick.”

Bivens is referring to what economists have called the “V-shaped recovery.” Under this model, the U.S. will suffer through a deep recession while doctors deal with the coronavirus threat. Yet with proper stimulus packages and legal relief (such as a moratorium on debt and rent collection), the U.S. business community could almost go into hibernation for this period, and recover quickly in a matter of months once the quarantine measure is lifted.

A strong stimulus package won’t prevent hardship over the coming months. This is particularly true for business owners who depend on these shops and restaurants to provide their livelihoods. A plan that helps them to meet their rent payments and keep the lights on still won’t replace the profits that owners rely on for their own income, leaving them with nothing on which to live during the quarantine. It could, however, prevent the widespread closures and bankruptcies that would wipe employers and purchasers across the country, and along with them any opportunity for a quick recovery.

Even that best case scenario depends on speed.

Over the course of several interviews, small business owners who spoke with this reporter laid out a stark series of options. As the end of March approaches, they will have to pay their costs for the month of April. Rent, loan and contract payments will come due for another month, and in many cases, this will strain already stretched resources. Shop and restaurant owners have described an agonizing choice: do they pay their bills and hope for a miracle in the coming month, or do they close their doors while they still have some money left in the bank?

With less than a week left before April 1, some small business owners will simply decide that the strain is too great. Others will run out of resources in the weeks or months ahead.

For entrepreneurs without help, this is not a simple matter of money. It will be the end of their dreams. 

Edit to Reflect Current Events - This article was filed on Tuesday morning, before Congress announced its stimulus and rescue package. 

The news of a major bill to subsidize income for all Americans and stabilize small businesses should come as a great relief for business owner, as this is exactly the kind of aid package that Bivens spoke of. At $2 trillion in total spending and loans, this bill would also be largest single act of spending in U.S. history if passed as currently written. In inflation-adjusted terms, the Coronavirus Aid, Relief, and Economic Security Act in fact will cost half as much as the United States spent to fight all of World War 2.

In relevant part, the CARES Act will help small businesses with targeted loans either issued through or guaranteed by the federal government and the Small Business Administration. Businesses can receive one-time or ongoing loans to cover their fixed costs and overhead, including payroll, until December 31, 2020, with a cap of $10 million per business. To streamline the process, the CARES Act puts minimal requirements on these loans. The only qualifications to receive aid under this program are that the business was in operation on March 1, 2020 and that it paid salaries and payroll taxes for any number of employees.

Businesses will then be eligible to have some of this debt forgiven, including any amount spent on payroll up to $33,333 per employee and some pre-existing debt payments. Readers can find the text of the bill, at time of writing, here.