Due to COVID-19, the US is currently facing the worst economic downturn since the Great Recession. Small businesses that lack the resources of larger companies are the most vulnerable in these tough times.
According to the Small Business Administration (SBA), a small business is any firm with 1–499 employees. Under this definition, small businesses make up 47.3% of all private-sector employees but a whopping 61% of new jobs. So even a minor disruption in small businesses could affect a large portion of employees and the economy, especially during attempts at recovery.
We’re witnessing this disruption already. With 22 million Americans filing for unemployment in the last 4 weeks (and the actual unemployment numbers almost certainly being higher), at least 20% of the workforce is already unemployed. That’s the highest rate by far since the Great Depression. (Unemployment hit a peak of 9.9% following the 2008 recession.)
In this article, we’ll look at the typical lifespan of small businesses, how COVID-19 may change that, and what can be done by small business owners to mitigate the damage.
How Many Small Businesses Close in a Typical Year?
Don’t believe the horror stories you’ve heard: small business survival rates are not as bad as you think. In the first year, 20% of small businesses close—or 80% survive, if you’re a glass-half-full person. (That oft-repeated statistic that 9 out of 10 restaurants close in the first year? It’s actually only 15%.) What’s more, small business closures are usually quite consistent year-to-year despite fluctuations in the economy.
SBA data show that from 2008–2016, firm closures hovered around 400,000 per year. With 30.2 million small businesses in the US in 2018 and presuming 400,000 closures, that would mean 1.3% of all small businesses go under in a typical year. But 2020 is no typical year.
US Chamber of Commerce: 24% of Small Businesses Will Close Permanently in Next 2 Months
One pro-business lobbying group, the US Chamber of Commerce, has produced some of the most startling numbers in a survey with MetLife. According to their survey of small businesses, almost a quarter will be forced to close permanently in the next 2 months, with 11% not even making it through 1 month. The same survey also found that 54% of small businesses are already temporarily closed or will become temporarily closed in the next 2 weeks—a major step toward significant lost revenue.
Permanent closures of 24% of all small businesses would mean 7.24 million firms going under, an 18-fold increase over the usual total for the entire year.
The Federal Reserve: 17% of Small Businesses at Risk
A new report by the Federal Reserve’s regional banks has a slightly less dramatic, though still dire, outlook. The report shows that more than 1 in 6 small businesses would have to close or sell if they miss 2 consecutive months of revenue.
The Fed’s survey was taken in the final 2 quarters of 2019 when the coronavirus was not on the radar for anyone but a few economists and public health experts. Business owners may have been more optimistic when 2 months without revenue was a hypothetical, though it is now quite a real possibility.
14% of respondents said they could operate as usual with existing cash reserves. The remaining 86% would require other interventions, including dipping into the owner’s personal funds (47%), layoffs (33%), and downsizing (30%). Closing (17%) was the least reported of the available responses.
If the recent Federal Reserve survey is accurate and 17% of small businesses fail sometime this year due to the lack of revenue from coronavirus, it would mean over 5 million closures, an increase of almost 13 times over.
How to Reduce the Number of Small Business Closures
It’s important to remember that these closure rates assume that nothing will change in the coming weeks. Additional capital for small businesses could significantly alter the outlook. Fortunately, there are numerous avenues for aid, including both new options specific to the pandemic and those that have existed for years.
Payroll Protection Program: The PPP is probably the most well-known small business relief program right now. It is a new SBA loan created by the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to cover expenses like payroll costs, employee benefits, interest on mortgages, rent, and utilities. The maximum loan amount is $10 million (depending on your business’s expenses). It even may be forgiven under certain circumstances.
The PPP is being administered through existing SBA 7(a) lenders. The application can be confusing and time-consuming, but you can apply through an online marketplace like Lendio.
Note: The initial $350 billion in funds for this program has been exhausted, but Congress is working to approve more.
Economic Injury Disaster Loan: EIDLs are another SBA loan funded by the CARES Act. They provide up to $2 million over 30 years to businesses that can prove loss of revenue caused by COVID-19. The requirements are stricter than for the PPP and the money comes directly from the federal government, not a lender intermediary, so this option will take longer for approval. However, $10,000 emergency grants are available, even if your application is denied.
Note: The initial funds for this program have also been exhausted, but more is expected to be approved.
Non-SBA Options: Traditional means of funding small businesses are still available. That includes short term loans, business credit cards, lines of credit, and equipment financing. These options might be better for small business owners wary of incurring large amounts of long-term debt.
There’s no doubt that the coming months will be devastating for many small businesses. However, with literally trillions of dollars in aid available from both public and private sector sources, there is hope that firms can survive several weeks of reduced or nonexistent revenue. Small business owners should explore all of their options and reach out to experts for help.