Can Small Firms Weather the Economic Effects of COVID-19? (Released April 2020)
Summary
This brief, released April 2020, uses the Federal Reserve Banks' 2019 Small Business Credit Survey to judge how small firms might stay afloat during COVID-19. It sorts firms by profitability, credit risk and use of retained earnings: of 3,267 firms, 35% were healthy, 35% stable, 23% at risk and 6% distressed. Smaller firms, younger firms and firms with black or Latino owners were more likely to be at risk or distressed; among firms with $100K or less in annual revenue, 17% were distressed. Only one in five healthy firms, and even fewer less-healthy firms, had enough cash reserves to continue normal operations through a two-month revenue loss. A majority would likely reduce their workforce and operations or delay payments, and many would rely on personal funds or debt.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Cite this document
“Can Small Firms Weather the Economic Effects of COVID-19? (Released April 2020).”
Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/smbliq-b-033-can-small-firms-weather-the-economic-effects-of-covid-19-68bddbf0f4/
, SHA-256 153616ef88e7cd433378c9d7d7349269f2aa2173b2322f4a2ab2b0ddc7954569.Full text
Released April 2020
CAN SMALL FIRMS
WEATHER THE ECONOMIC
EFFECTS OF COVID-19?
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.1 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 busi-
nesses 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.
UNDERLYING FINANCIAL HEALTH
First, we looked at firms’ financial health in 2019, focusing on profitability, credit risk, and business
funding. Among these three facets, we categorized “healthy” firms as those that are profitable, have
higher credit scores (low credit risk),2 and use retained business earnings3 to fund the business. Firms
that meet only two of these criteria are “stable,” one of these criteria are “at risk,” and none of these
criteria are “distressed.” Figure 1 shows aggregate percentages.
FIGURE 1 FINANCIAL HEALTH SPECTRUM4 N=3,267
35% Healthy 35% Stable 23% At risk 6%
Distressed
1 See for example: https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page; https://portal.ct.gov/DECD/Content/Business-
Development/05_Funding_Opportunities/Small-Business-Express; https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-
advisories/sba-provide-disaster-assistance-loans-small-businesses-impacted-coronavirus-covid-19.
2 Credit risk is based on the self-reported business credit score or personal credit score, depending on which is used. If the firm uses both,
the lower credit score is used. “Low credit risk” is a 80–100 business credit score or 720+ personal credit score.
3 Primary source of business funding is retained earnings, rather than external financing or personal funds.
4 Percentages may not sum to 100 due to rounding.
Source: Federal Reserve Banks, 2019 Small Business Credit Survey 1
Can small firms weather the economic effects of COVID-19?
However, the aggregate numbers mask variation in the small business population. As shown in Figure 2,
some firms tended to be financially healthier than others, including larger and more mature firms. In
contrast, smaller firms, younger firms, and firms with black or Latino owners were more likely to show
signs of limited financial health. It is important to note that firms helmed by black or Latino owners
face structural barriers that influence their business’ financial health.4
FIGURE 2 FINANCIAL HEALTH SPECTRUM BY FIRM CHARACTERISTICS5
Healthy Stable At risk Distressed
All firms N=3,267 35% 35% 23% 6%
$100K or less N=287 8% 30% 45% 17%
Annual revenue $100K-$1M N=1,169 30% 39% 23% 8%
More than $1M N=1,626 45% 34% 18% 3%
1-4 employees N=1,207 32% 36% 25% 8%
Number of employees 5-19 employees N=1,416 35% 36% 23% 6%
20-499 employees N=644 47% 32% 17% 4%
0-5 years N=890 23% 37% 31% 8%
Age of firm
>5 years N=2,377 41% 35% 19% 5%
Non-manufacturing goods production
33% 36% 25% 6%
& associated services N=647
Industry Retail N=362 34% 37% 25% 5%
Leisure & hospitality N=325 27% 37% 28% 8%
Healthcare & education N=286 38% 35% 22% 5%
Non-Hispanic White N=2,486 37% 36% 22% 5%
Non-Hispanic Black or African
Race/ethnicity 17% 26% 37% 21%
American N=335
of ownership6
Non-Hispanic Asian N=127 29% 40% 23% 8%
Hispanic N=269 22% 29% 31% 18%
DEALING WITH FINANCIAL LOSS
A new question in the 2019 survey asked business owners how they would respond to a potential
financial loss equal to two months of their revenues. Unfortunately, the scenario posed in this question
no longer represents a hypothetical situation for firms facing the effects of COVID-19.
As shown in Figure 3, we find that responses differ across the financial health spectrum. Only one in
five healthy firms reported they could continue business as usual with their cash reserves; this number
falls to less than one in ten among stable, at-risk, and distressed firms. Further, there are clear work-
force implications, as two of the most common responses include reducing salaries and laying off
workers, especially among the healthiest firms. To bridge funding gaps, firms in all four categories said
they would rely on the owners’ personal funds, but this tactic was more common among at-risk and
distressed firms. In addition, at-risk and distressed firms were more likely to report an inclination to take
out debt than were healthier firms. This may have an impact on the types of recovery programs and
loans that could work best for different types of small businesses.
4 For example, black- and Latino-owned firms are more likely to report higher credit risk ratings than white-owned firms. For more information, see:
https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/20191211-ced-minority-owned-firms-report.pdf.
5 Percentages may not sum to 100 due to rounding.
6 This table uses Census-defined categories of race and ethnicity. In the text of this paper, we use “Latino” instead of “Hispanic.”
Source: Federal Reserve Banks, 2019 Small Business Credit Survey 2
Can small firms weather the economic effects of COVID-19?
FIGURE 3 ACTIONS FIRMS WOULD TAKE TO RESPOND TO A 2-MONTH REVENUE LOSS7
Healthy N=1,192
Cut salaries or lay
off workers Stable N=1,076
At risk N=764
Downsize operations or
defer payments/expenses Distressed N=226
Use owner's
personal funds
Take out debt
Close or sell the business
No action; use cash reserves
to continue normal operations
0% 10% 20% 30% 40% 50% 60% 70%
CONCLUSION AND IMPLICATIONS
Understanding the financial position of small firms prior to the onset of the COVID-19 pandemic can help
inform efforts to support those businesses through these challenging times. As demonstrated in the
survey responses, small businesses vary greatly in their financial strength and resilience in the face of
significant financial challenges. The data presented here provide insights on firms’ planned responses
to a particularly relevant hypothetical scenario of revenue losses. This preview of firms’ expected
actions can provide policymakers with important information as they determine the most effective
responses to the current crisis.
Claire Kramer Mills, Ph.D., Assistant Vice President
Jessica Battisto, Senior Analyst
7 Respondents could select multiple options. Some response options have been combined for readability.
Source: Federal Reserve Banks, 2019 Small Business Credit Survey 3
File and source
- File
- SMBLIQ-B-033_can-small-firms-weather-the-economic-effects-of-covid-19_2020-04-07_full-report.pdf
- Size
- 302,789 bytes
- SHA-256
- 153616ef88e7cd433378c9d7d7349269f2aa2173b2322f4a2ab2b0ddc7954569
- Our copy
- SMBLIQ-B-033_can-small-firms-weather-the-economic-effects-of-covid-19_2020-04-07_full-report.pdf
- Original
- No public link identified.