5 Charts on How COVID-19 is Devastating Entrepreneurial Ecosystems
Theory to Practice is an occasional blog series that explores the intersection of economic development research and current issues of debate within the practitioner community. In this post, Jamie McCall, CSBDF’s Vice President of Policy and Research, shares some new data on how COVID-19 is affecting small businesses. For more information about CSBDF’s research and policy analysis program, click here.
Even in the best of times, we don’t often get a lot of real-time data on the operations of small businesses. Public data sources often have significant time lags, which makes assessing how entrepreneurs are faring difficult to do at the macro level. For better or for worse, the COVID-19 pandemic has resulted in more data collection from scholarly sources and interest groups.
We generally believe that small business owners are resilient, and the qualities that make someone an entrepreneur can help them succeed even in a crisis. But as more data emerges on this topic, the consensus is clear: the situation is dire. And now – more than perhaps ever before – we need innovative policy solutions to help small business owners.
1. Early indicators show COVID-19 is causing a shocking level of small business job loss. Entrepreneurs are laying off workers at a rate 10x higher than they did during the Great Recession.[i]
A recent working paper from the National Bureau of Economic Research provides some of the first real hints we have on economic impacts specific to small businesses. The analysis polled a nationally representative group of small business owners across the United States. Respondents at businesses employing 0-19 reported a 42% decline in employment levels between January and March 2020. This is an astonishing decline in jobs over just a few months. In comparison, employment at these types of small businesses declined 3% throughout the financial crises. Even when compared to overall rates of job loss – 1 in 6 Americans reported losing their job during the Great Recession[ii] – the current data are sobering.
2. Job losses at smaller businesses will likely accelerate. Data extrapolations suggest North Carolina could see 539,041 layoffs – which is 1/3 of all employment at the state’s smaller firms.[iii]
According to survey data of investment-backed small businesses, the trend of small business job loss will accelerate. Respondents to the survey were asked to indicate what percentage of their workforce had been laid off by March 21 as well as what percentage of their workforce they expected to layoff. Most small business owners expect to lay off far more workers in the future. Main street retailers, for instance, plan to lay off up to 19% of their employees. The single industry exception are hospitality firms, but that is only because they have already laid off 43% of their workforce. UNC’s Kenan Institute extrapolated this data for North Carolina’s smaller employers:
3. Though it’s still too early to know for sure, COVID-19’s economic fallout may be more likely to adversely affect certain minority entrepreneurs.
In a recent analysis of its 2019 small business survey data, Federal Reserve research staff argued that the economic impacts of the pandemic were more likely to affect minority-owned firms. The reasoning is simple. Due to structural barriers to success often faced by minority small businesses,[iv] they tend to be more financially “at-risk” or “distressed” than enterprises owned by white entrepreneurs.[v] In the context of the pandemic, those challenges could result in a disproportionately high level of business failures for groups including African Americans and Hispanics.
4. Most small businesses are nearing the end of their cash reserves. Within 1-2 months, more than half of small firms could collapse.
The National Federation of Independent Businesses has conducted a series of surveys about how small businesses are doing throughout the COVID-19 emergency. Their most recent data, released at the beginning of April, gives some insight on how much longer businesses can operate on their cash reserves. About half of respondents indicate they have 2 months or less of cash reserves under current economic conditions. As more governments extend mandatory “shelter in place” orders, the chances of the COVID-19 quarantine exhausting cash reserves of small businesses is growing increasingly likely.
5. When millions of Main Street small businesses shutter, the reverberations are felt throughout the economy.
Small businesses are the cornerstone of economic systems – both in North Carolina and across the country.[vi] A new report by Main Street America estimates that millions of small businesses are in imminent danger of failure. The data show that what small business owners need most is financial assistance and relief from expense payments. That’s one reason why Carolina Small Business is offering deferrals and interest-only payments to those we serve. Community institutions like us exist to promote small businesses in a sustainable manner, and in the coming months and years we want to do everything we can to help the state’s entrepreneurial ecosystem survive and thrive in the aftermath of COVID-19.
References and Notes
[i] Concurrently, we need to be cautious about interpreting this data. This is one of the first national-level indicators we have about small business employment trends since COVID-19. But it comes from a survey, and the distribution is is geographically concentrated in certain states.
[ii] Henry Farber, “Job Loss in the Great Recession and Its Aftermath: U.S. Evidence from the Displaced Workers Survey,” Working Paper (Washington, DC: National Bureau of Economic Research, 2015), 10.3386/w21216.
[iii] These findings are especially sobering when considering that anticipated layoff activity is probably under-reported. To the extent layoffs are perceived as a socially undesirable behavior, business owners are less likely to report plans to do so through surveys. See Ivar Krumpal, “Determinants of Social Desirability Bias in Sensitive Surveys: A Literature Review,” Quality & Quantity 47, no. 4 (June 1, 2013): 2025–47, https://doi.org/10.1007/s11135-011-9640-9.
[iv] Ben R. Craig, William E. Jackson, and James B. Thomson, “Small Firm Credit Market Discrimination, Small Business Administration Guaranteed Lending, and Local Market Economic Performance,” The ANNALS of the American Academy of Political and Social Science 613, no. 1 (September 2007): 73–94, https://doi.org/10.1177/0002716207303579.
[v] Distressed includes respondent small firms that (1) have lower credit scores, (2), are not profitable, and (3) do not use retained earnings to fund the business. At risk firms are those who meet at least one of these three criteria.
[vi] D. Keith Robbins et al., “An Empirical Assessment of the Contribution of Small Business Employment to U.S. State Economic Performance,” Small Business Economics 15, no. 4 (December 1, 2000): 293–302, https://doi.org/10.1023/A:1011129728483.