Small business owner wearing a mask and speaking with a customer

The Long-Term Economic Impact of COVID-19 on Small Business

10+ min read • Apr 15, 2020 • Joe Kukura

It was a shock to hear recent official federal estimates that we could see 100,000 to 240,000 Americans die from coronavirus infections and see the unemployment rate could hit an unthinkable 32%. It’s even more of a shock that these projections seem to be slowly coming true, with shutdown orders bringing businesses to a standstill and a COVID-19 recession appearing to be a looming certainty.

The economic devastation is hitting everyone from small businesses on Main Street to big investors on Wall Street—not just in the US, but globally too.

“We are now in recession. It is way worse than the [2008] global financial crisis,” International Monetary Fund Managing Director Kristalina Georgieva recently told the World Health Organization. “This is, in my lifetime, humanity’s darkest hour.”

We’ll hope it doesn’t come to that. But previous projections of the economy being back open by Easter certainly failed to become reality. A full 17 million jobless claims were made in the last 3 weeks, and analysts expect April will turn out to be a far worse month. The COVID-19 economic carnage probably still has not peaked, and your small business needs to focus on short-term survival for as long as it takes for the economy to weather this storm.

The big question, though, is how long it will take to weather this storm and return to economic normalcy. 

In China, which is a month or 2 ahead of us on public health efforts and economic stimulus measures, everyday life and financial activity are showing signs of returning to normal. CNN Business notes that Germany and Austria are tinkering with models to get the uninfected back to work while still containing virus spread.

But even these are not long-term projections—they’re just optimistic models of where we could be by the early summer. And any delicate progress could suffer a horrifying relapse.

To figure out the long-term outlook for US small businesses in 2021 and beyond, we have to look at extremely speculative crystal ball projections. But we turned to some of the sharpest financial analysts in the business analysis sector. They all agree that everything is dependent on the public health priorities of limiting fatalities with a vaccine, distributing robust testing systems to determine who is infected and who’s not, and the ability of us as a society to maintain physical distancing before we’ll experience any possible forthcoming economic recovery.

How Bad Will the Coronavirus Recession Be?

Management consulting firm McKinsey & Company put out an analysis of the COVID-19 financial impact that has been widely shared and discussed in financial circles. And its analysis of the effects of lockdown and shut-in orders is indeed grim.

“We estimate that 40 to 50% of discretionary consumer spending might not occur,” McKinsey predicts in their analysis. “A 40 to 50t drop in discretionary spending translates to a roughly 10% reduction in GDP—without considering the second- and third-order effects.” 

In plain English: The “GDP” is the Gross Domestic Product, a statistic that quantifies how many goods and services are sold in the country. By “second- and third-order effects,” they’re referring to potential large-scale small business closings, Lehman Brothers-style corporate collapses, and crashing financial markets. Meaning the economy might drop to half its normal production, setting off some really awful domino effects for businesses big and small.

And while there have been encouraging, even eye-popping dollar amounts of federal relief for small businesses, we cannot bet the farm on those trillion-dollar headlines. This distribution of coronavirus SBA loans is frankly off to a very shaky start, with banks overwhelmed by the volume of applications and strict SBA loan criteria leaving many small businesses denied.

That giant federal relief package may not be enough (though there could be another stimulus bill on the way). The economic impact will still be driven more by our public health response than government bailouts. In their “How this could unfold” analysis, McKinsey games out 3 virus response scenarios.

The first is an effective response that halts the spread through successful, large-scale testing combined with social distancing, which has worked (so far) in countries like South Korea and Taiwan. McKinsey also considers a second-rate response—one that allows for the dreaded re-emergence after an initial decline. They also contemplate a worst-case scenario wherein nothing halts the rapid US domestic virus spread until a vaccine is finally developed.

America’s new unofficial personal doctor Anthony Fauci has said that the vaccine timeline is “on target for the year to year and a half,”  a timeline some doctors argue might be too optimistic. Keep in mind that the viruses HIV and hepatitis C still do not have vaccines developed, even though those diseases have been around for generations. There’s no guarantee that we’ll see a white knight vaccine introduced anytime soon. And even if it is, it would have to be produced and distributed at a massive scale far more effectual than our current tie-ups in production of respirators, masks, and personal protective equipment.

The COVID-19 Economic Recovery

But back to the economy. McKinsey then combines those 3 virus response scenarios with their aforementioned “second- and third-order effects”—a ballooning historic economic crisis with massive bankruptcies and another banking crisis, a scenario wherein financial institutions effectively survive but smaller institutions recover much more slowly, and a 3rd way where policy interventions effectively restore the previously strong fundamentals of the economy.

They run all 3 public health scenarios with the 3 economic outcomes to create a group of the 9 likeliest possibilities in an economic impact of the COVID-19 crisis graph. You’ll notice that some of the outcomes are shaded in grey, which are favorable scenarios they say “many currently expect.” Each of these is a U-shaped or V-shaped curve that does indeed depict terrible recession conditions but also has us coming out of the downturn in a pretty good position. These all show the economy fully recovering or almost fully recovering. (These are all covered far more deeply in McKinsey’s 56-page COVID 19: Global Health and Crisis Response.) 

But 5 of the 9 scenarios are pretty terrible, including what they call the “black swan of black swans”—that is, a situation with no economic recovery. Some of the other terrible projections show the economy not recovering in the foreseeable future, the virus spread continuing for more than a year without a vaccine, and governments unable to plug a nonstop stream of layoffs, bankruptcies, and additional financial crises.

Under these scenarios, a full recovery would not occur until 2022 or 2023 or later—or perhaps never. These are severe and considered unlikely, but McKinsey notes, “we cannot exclude these more extreme scenarios for now.”

The Optimistic Case for a COVID-19 Recovery

Some industries and sectors will be able to recover more quickly than others. Financial analytics firm Morningstar has its own long-term coronavirus economic impact forecast that predicts the pain will be “less than [the] 2008 Recession.” They predict a substantial drop in cases “by the end of May,” and the lifting of societal movement restrictions ”in June and July.” While the Morningstar analysis predicts the dread second spike of infections later this year, they also anticipate effective pharmaceutical treatments being available in the summer months and “ultimately a vaccine in 2021.”

“We still expect a modest long-run economic impact, with GDP down 0.9%,” the Morningstar analysis predicts. But the authors also add, “In our view, a COVID-19 recession doesn’t fit the mold of a 2008-style recession with longer-lasting economic impact.”

Their report is quite lengthy but well worth a read. Deep into the analysis, Morningstar addresses the topic of which sectors will suffer the steepest and lengthiest downturns. They do predict a bad 2020 downturn—but an eventual 2021 rebound—for hotels, restaurants, arts and entertainment, and air travel or businesses who rely on air traveler-related revenue. In fact, they get quite granular in their predictions of overall 2020 business declines for air travel (35%), hotels (37%), and restaurants (18–30%, with finer dining taking the higher-end losses).

Those declines might sound less severe than what your small business is encountering right now, as in many areas, forced shutdowns have reduced business by as much as 100%. But keep in mind that those doors are likely to reopen at some point this year, and customers will have money to spend in ways that they cannot right now. 

How Different Industries Will Recover from COVID-19 

Most small businesses will have to view April, and possibly the whole month of May, as a complete scratch. Arts and entertainment face the toughest road, as more than “75% of large events will be canceled through the end of 2020,” per Morningstar’s prediction. Many arts and entertainment events and shows are being reintroduced as online streaming experiences, but this process is coming along slowly and events are proving difficult to monetize. But the quality of these events and their revenue-generating ability are improving with each successive weekend.

On the brighter side financially, Morningstar feels retail is positioned to weather this situation similarly to the 2008 recession. It’s odd to hear a 2008 recession comparison as a favorable and rosy assessment, but here we are.

Retailers understand that the current situation is quite bleak, though a large percentage of them benefit from their sectors falling into “essential business” categories that have been allowed to remain open during shelter-in-place orders. While various states and municipalities define “essential services” differently, the Department of Homeland Security has a list of which businesses are essential businesses in most areas. In addition to retail, this generally includes healthcare services, restaurants, trucking and transportation, and banks and financial services.

The retail industry also has the advantage of creating online ordering and delivery options. Online delivery for restaurants is obviously booming, but retailers can also use more general delivery services like Postmates or set up other methods for delivery or curbside pickup. Even a simple online marketplace or email exchanges can be used to facilitate sales to keep a retail business up and running until foot traffic patterns can return to normal.

How Your Business Can Recover for the Coronavirus Downturn

Some very big unknown, wild-card factors will determine the extent of the COVID-19 recession—how high the unemployment rate will go and when consumer spending will return to anything resembling previous levels. Those hardest-hit sectors we named above (restaurants, bars, travel, and entertainment) employ a disproportionate percentage of the US workforce. The layoffs in those sectors are already severe and figure to get worse. That means substantially fewer Americans with disposable cash in their pockets, a factor surely likely to hammer overall consumer spending in the months to come. 

But it’s already clear the inevitable changes to buyer behavior and everyday practices to which businesses will need to adapt until this coronavirus outbreak is defeated entirely. The sooner your business can adapt to these inevitable forthcoming changes, the sooner your incoming revenue can return to the glory day levels you enjoyed a mere 3 months ago. 

It will remain exceedingly important for us as a society to control our movements and remain 6 feet apart. Expect such restrictions to remain the “new normal” up until the summer, if not longer. You may have already seen duct tape on the floor at grocery stores or hardware shops, a crude but effective method of enforcing physical distancing. Businesses in other sectors can reorganize their physical logistics in a far more elegant and consumer-friendly fashion to keep workers and shoppers at a safe and appropriate distance from one another. Restaurants, bars, theaters, and retail shops can easily make these changes to open their doors to limited but precious business in the near future.

Restaurants and retailers can shift toward delivery models to generate some revenue over the next couple of months. Your business can also raise some fast cash with small business gift cards, giving your customers who are able an opportunity to gift their friends or family a purchase while gifting your company some money. Here at Lendio, we’ve partnered with some other lending startups to create the Help Small Business platform that allows any business to create gift cards and gift certificates.

There are plenty of other loans and grants from the federal government, your state, or various private sector efforts from Facebook, GrubHub, and Yelp. Check out our Relief Resources for Small Business, which includes many sources of grants, loans, and assistance.

How Coronavirus Will Change the Economy 

Many of the primary factors that will drive an economic recovery are, regrettably, beyond our control. COVID-19 testing is probably the most important of these. If we can expand our ability to test for the virus, we can identify who has it and who doesn’t. A solid sense of knowing who is not infected could, for a significant portion of the population, begin to bring back the ability to travel, attend events, and enable some degree of normal functioning for downtowns and business districts. This could be key to kickstarting the economic recovery.

But this may also come with a loss of freedoms, rights, and privacies that we have always cherished and taken for granted. You’re beginning to see this with churches being told they cannot congregate and some of them doing so anyway. This conflict is likely to be the first of many between individual freedoms of movement and the genuine need to contain the virus spread to save lives. 

We might also be asked to accept levels of surveillance that we had never before thought tolerable. You may have seen “heat map” images that show smartphone location data of people who have traveled to and from Florida, New Orleans, or other vacation spots. The tracking of smartphone location data may be a terrific way to track the spread of the virus, but it might also evolve into one of the most significant personal privacy infringements of the digital era.

Consider Hong Kong, a city generally thought to be doing pretty well at halting the COVID-19 spread. But that’s come at a cost. People who’ve tested positive there are ordered to not only self-quarantine but are then geo-fenced with a location-tracking wristband that monitors their movements and the details of their homes or apartments, with the threat of prison for violators who move beyond their homes. Reuters reports that Moscow is using facial recognition cameras to enforce their quarantines. If these draconian measures are effective abroad, we may see them implemented here, essentially trading one nightmare for another.  

How You Can Get Small Business Support Now

Other nations’ responses to the crisis, and whether their strategies result in solid economic recoveries, will help and determine our management of the outbreak and the eventual reopening of the US economy. These responses will take weeks or months to evaluate.

But there is help available to small businesses now. This is the quickest economic downturn we have seen in our lives, and there is some chance it will be the most severe. Entire industries could be decimated. Local, state, and federal leaders made the right decision to deliberately shut the economy down to avoid a more catastrophic health crisis. For many businesses, the damage could last long beyond the development of a vaccine or cure.  

Your business may feel like it’s sick in a hospital bed and on life support. But the right medicine may be a short term loan, an SBA loan, or a merchant cash advance. Because just like a sick patient, your business has to survive and slowly get better in the short term before recovering to full health in the long term. 


Joe Kukura

Joe Kukura is a San Francisco freelance writer whose work also appears in SF Weekly and SFist. He’s written financial advice for NerdWallet, tech industry analysis for the Daily Dot, sports content for NBC Bay Area, and good, old-fashioned clickbait for Thrillist.