Can Small Firms Weather the Economic Effects of COVID-19?
Federal Reserve Bank of New York
First published April 2020
With each day that passes, the far-reaching economic implications of the COVID-19 pandemic become increasingly apparent. Of particular concern are the effects the pandemic is having and will continue to have on small businesses as they endure the direct impacts of social distancing directives, including temporary closures and modified operations. With declining revenues, many small firms have had to lay off employees. Governments have begun offering small business loans with attractive interest rates and repayment terms in order to help smooth cash flow and retain employees. While we do not have real-time data on the quickly changing small business conditions, the 2019 Small Business Credit Survey sheds light on how firms are likely to remain afloat during this uncertain time.
Overall, we find:
- Even in late 2019, a period characterized by positive economic growth and low unemployment, small businesses exhibited varying degrees of financial health. Smaller firms, younger firms, and firms helmed by black or Latino owners were more likely to be classified as “at-risk” or “distressed.”
- Only one in five healthy firms (and even fewer less-healthy firms) had sufficient cash reserves to continue normal operations if they experienced a two-month revenue loss. A majority of small businesses would be likely to reduce their workforce and operations, or delay payments. Many firms would rely on personal funds or debt to bridge the gap.