What Happens If Small Businesses Don’t Recover?

May 7, 2020
Author: Mara Zemicael

Small businesses play a vital role in the U.S. economy. In fact, 30.7 million U.S. businesses fall into this category. According to the U.S. Small Business Administration (SBA) Office of Advocacy, 47.3% of workers in the U.S. are employed by a small business, which is generally defined as a business having 500 employees or less.

Almost half of workers in the U.S. are employed by small businesses.

The economic downturn resulting from COVID-19 prevention measures has made many businesses nervous about the future, especially small ones. In a March 26 survey, the National Bureau of Economic Research found that only three-quarters of the 5,819 small businesses its researchers surveyed had enough cash to cover a maximum of two months of business expenses. It also found that 43% of respondents had temporarily closed because of COVID-19. Respondents cited reduced demand and concerns about employee health as their main reasons for the closures.

Even with some states allowing the reopening of nonessential businesses and the second round of the Paycheck Protection Program (PPP), many small business owners still find themselves facing economic uncertainty.

For instance, when her state permitted certain nonessential businesses to reopen in April, Patricia Spires, who manages the Book Dispensary in Columbia, South Carolina, had concerns about the health risks of reopening too soon, as well as the economic hit of remaining closed for too long. While the Book Dispensary was able to earn revenue from online and curbside sales, this brought in only 40% of its typical revenue. Spires told Time, “We can’t afford to not reopen. As a small business, in order to survive, we have no choice but to open and do the best we can to protect the employees as well as the customers.”

Why Small Businesses Are Needed

So, what happens if too many small businesses can’t recover once the current pandemic is over? With almost half the country’s workers being employed by small businesses, Marianne Wanamaker, an associate professor of economics at the University of Tennessee and a ThinkWhy Executive Advisory Board member, said that even if one in five small businesses struggle to survive during COVID-19, 10% of American employment is at risk.

“The lack of entrepreneurial/startup activity during the COVID-19 crisis will be a drag on employment going forward,” she says. “The U.S. averages about 850,000 new business applications a year. We are currently down about 20% on those applications. Each startup employs an average of eight workers, so over the course of a year, a 20% reduction in new business applications is about 1.5 million lost jobs.”

Related: Rebound: 3 Recovery Scenarios for the U.S. Economy

The lack of new businesses being created is a legitimate fear. According to the SBA, in the five weeks following the declaration of a national emergency on March 13, new business applications decreased by over 27% compared to the same time in 2019. That was the largest drop in the history of this data being collected.

Small businesses are important to the U.S. economy.

Small businesses play a huge role in keeping the U.S. economy going. They are responsible for both job creation and offering employment opportunities to a wide range of people. In fact, the SBA found that the 1.8 million net new jobs in 2019 were created by small businesses. It also stated that in 2018, 8.7 million small businesses were minority-owned.

Long-term Business Impacts Remain Unclear

Throughout March and April, many small business owners found themselves facing tough choices. Do they temporarily close or offer select services? Do they reduce their staff’s hours or lay them off? Even those who have been able to secure a PPP loan struggle with the program’s loan-forgiveness requirements, such as retaining the same staff levels they had on Feb. 15. Without knowing when consumer demand will return to pre-pandemic levels, many business owners wonder whether it’s financially worth returning to their pre-pandemic staffing levels. Plus, some former employees are earning more in unemployment benefits than they would at their previous jobs.

As multiple states begin the process of gradually reopening with various degrees of enforcing COVID-19 prevention measures, business owners face many challenges. Those challenges include not knowing when consumer spending and employment will return to pre-pandemic levels. Some consumers may stay close to home because of health concerns, while some may feel the need to save more and spend less until the economy recovers.

ThinkWhy continuously monitors and forecasts industries and MSAs to measure the impact on the labor market. Stay current with us. We are here to support organizations and provide insights during the economic downturn as well as the recovery phase.