How Important are Small Businesses?

In April, the Federal Reserve Bank of New York (FRBNY) surveyed U.S. small businesses. It reported, late in 2019, before the coronavirus crisis, 35 percent were healthy, 35 percent were stable, 23 percent were at risk, and 6 percent were in distress.

Having a preponderance of healthy and stable small companies is a positive economic sign because, as Lisa Beilfuss of Barron’s explained, small companies:

• Employ about 50 percent of American workers

• Produce about 50 percent of U.S. GDP

• Generate 40 percent of total business revenue

Simply put, small businesses are an essential part of the American economy.

The FRBNY survey also noted few small businesses had deep cash reserves. In fact, it estimated just one in five healthy small companies could survive a two-month revenue loss. In such circumstances, “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.”

As you might imagine (and may have experienced), the coronavirus crisis has exacted a heavy toll on small businesses. Forty-three percent were temporarily closed by April 2020, according to a survey conducted by the National Bureau of Economic Research (NBER). Others had modified operations to meet social distancing and other COVID-19 safety guidelines.

In an effort to help small businesses, Congress, the President, and the Small Business Administration have passed fiscal stimulus measures. The Federal Reserve is providing monetary stimulus. Despite these efforts, the future of small companies remains uncertain.

Byrne Hobart of The Diff, a newsletter that tracks inflection points in finance and technology, believes diverse outcomes are possible:

“The pessimistic one is front-end corporatization: small businesses just evaporate, their real estate is taken over by big companies, and (some of) their employees find new jobs at these companies…Here’s the good one. Those same local businesses are running down their cash reserves, but lenders are banging down the door with a crazy offer: borrow enough to meet payroll now, pay nothing – until business starts coming back…[Lenders get] more involved in the borrower’s business – get them good bookkeeping software and a modern point-of-sale system. Band together a bunch of borrowers and start negotiating with suppliers and landlords. In short, use software economics to give small businesses the same economies of scale that large ones already benefit from.”

It’s possible we could see both situations occur.