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Most Small Businesses Couldn’t Survive a 6-Month Shutdown: Study

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The 8.7% drop in retail sales this past month highlighted the problem small businesses — including advisory firms if they aren’t technologically savvy — are having due to the coronavirus crisis. A recent working paper by the National Bureau of Economic Research found that overall only 38% of small businesses expected to still be in business in six months if they had to remain closed. For restaurants and bars, that figure was 15%. In fact, only 72% of all small businesses surveyed stated they could last one month, and 47% said they could last four months.

Other themes emerged in the survey of 5,800 small businesses:

  • 43% of those surveyed were temporarily closed, and, on average, have reduced employee counts by 40% relative to January 2020 (the Mid-Atlantic region — including New York — has been particularly hurt, with 54% of firms closed and employees down by 47%);
  • These businesses are “financially fragile.” For example, the median business has more than $10,000 in monthly expenses and less than one month of cash on hand;
  • There are varying beliefs on the duration of COVID-19 related disruptions, although the median business owner believes the crisis will last into midsummer;
  • The majority — 70% — planned to seek funding through the Payroll Protection Program that is part of the stimulus package. That program ran out of funding Thursday morning, and Congress is deadlocked on an extension.

The online survey, conducted through Alignable, had 5,819 responses from business owners with less than 500 employees.

In terms of industry impact, financial, professional services and real estate related businesses have seen less disruption than the retail, arts and entertainment, personal services, food services and hospitality businesses that had reported employment declines over 50%.

Not surprisingly, in-person industries like retail or personal services had a higher danger of not surviving.

The likelihood this crisis continues through July means many businesses will have to close. “This represents a shock to America’s small firms that has little parallel since the 1930s,” they note.

Small businesses employ almost 50% of American workers, the authors state, and they are the ones most in danger.

The paper states that these firms with little cash on hand will need to cut expenses, take on additional debt or declare bankruptcy.

Further, although the stimulus program brought on optimism, it was “unclear” how well the program will help these businesses.

The authors found, through basic math, that the initial $349 billion for this program wasn’t enough. Of the 72% of businesses that indicated they would apply for PPP loans, and take out the maximum loan size (2.5 months of expenses), “the total volume of loans would be approximately $410 billion.”

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