Small-Business Failures Loom as Federal Aid Dries Up
Posted September 1, 2020 7:52 p.m. EDT
Updated September 1, 2020 7:54 p.m. EDT
The United States faces a wave of small-business failures this fall if the federal government does not provide a new round of financial assistance — a prospect that economists warn would prolong the recession, slow the recovery and perhaps enduringly reshape the American business landscape.
As the pandemic drags on, it is threatening even well-established businesses that were financially healthy before the crisis. If they shut down or are severely weakened, it could accelerate corporate consolidation and the dominance of the biggest companies.
Tens of thousands of restaurants, bars, retailers and other small businesses have already closed. But many more have survived, buoyed in part by billions of dollars in government assistance to both businesses and their customers.
The Paycheck Protection Program provided hundreds of billions in loans and grants to help businesses retain employees and meet other obligations. Billions more went to the unemployed, in a $600 weekly supplement to state jobless benefits, and to many households, through a $1,200 tax rebate — money available to spend at local stores and restaurants.
Now that aid is largely gone, even as the economic recovery that took hold in the spring is losing momentum. The fall will bring new challenges: Colder weather will curtail outdoor dining and other weather-dependent adaptations that helped businesses hang on in much of the country, and epidemiologists warn that the winter could bring a surge in coronavirus cases.
As a result, many businesses face a stark choice: Do they try to hold on through a winter that could bring new shutdowns and restrictions, with no guarantee that sales will bounce back in the spring? Or do they cut their losses while they have something to salvage?
For the Cheers Replica bar in Faneuil Hall in Boston, the answer was to throw in the towel after nearly two decades in business.
“We just came to the conclusion, if we’re losing that much money in the summertime, what’s the winter going to look like?” said Markus Ripperger, president and chief executive of Hampshire House, the bar’s parent company.
Many businesses that failed in the early weeks of the pandemic were already struggling, had owners nearing retirement or were otherwise likely to shut down in the next couple of years. Those closing down now look different.
Cheers was a long-standing, successful business with access to capital and owners willing to invest to keep it going. But the bar, built to resemble the one on the 1980s sitcom, depended heavily on tourist traffic that collapsed during the pandemic. The company’s three other restaurants, which include the original Cheers bar on Beacon Hill that was the inspiration for the show, remain in business. But Ripperger said he was worried about what a winter resurgence of the virus might mean.
“We’re on life support now, and if we have to go through another shutdown or more restrictions, it’s going to be even worse for a lot more restaurants that are just barely scraping by,” he said.
On Friday, the Commerce Department reported that consumer spending rose only modestly in July after two months of resurgence and remained below pre-pandemic levels. Economists warn that without the $600 a week in extra unemployment insurance, spending is likely to slow further this fall.
Data from Homebase, which provides time-management software to small businesses, shows that roughly 20% of businesses that were open in January are closed either temporarily or permanently. The number of hours worked — a rough proxy for revenues — is down by even more during what should be the year’s busiest period. Both figures have stalled or turned down in recent weeks.
Small businesses have grown more pessimistic as the pandemic has dragged on. In late April, about a third of small businesses surveyed by the Census Bureau said they expected it to take more than six months for business to return to normal. Four months later, nearly half say so, and a further 7.5% say they do not expect business ever to bounce back fully. About 5% say they expect to close permanently in the next six months.
The ultimate damage could be much greater. In a recent survey by the National Federation of Independent Businesses, a small-business lobbying group, 21% of small businesses said they would have to close if conditions did not improve in the next six months. Other private-sector surveys have found similar results.
Widespread business failures could cause lasting economic damage. Nearly half of American employees work for businesses with staffs under 500, meaning millions of jobs are at stake. And while new businesses would inevitably spring up to replace those that close, that process will take far longer than simply reopening existing businesses.
“The consequences to allowing a tidal wave of closures is we will make every aspect of the recovery harder,” said John Lettieri, president and chief executive of the Economic Innovation Group, a Washington research organization.
There could also be longer-run implications. Despite high-profile bankruptcies in the retail industry and other sectors, many large corporations have been able to solidify their position during the pandemic: demanding concessions from landlords, borrowing billions of dollars at low interest rates and leveraging sophisticated supply chains and distribution systems to reach suddenly homebound customers. Small businesses, which usually have less access to credit and rely more heavily on foot traffic, have been struggling to survive.
The challenge has been particularly acute for Black-owned businesses, which were more than twice as likely to close down in the early months of the pandemic than small businesses overall, according to research from the Federal Reserve Bank of New York. Black-owned businesses were more likely to be in areas hit hard by the virus, had less of a financial cushion and were less likely to have established banking relationships, which put them at a disadvantage in seeking loans under the emergency Paycheck Protection Program in the critical first weeks that the aid was available.
By the time they got access to the federal money, “many Black-owned businesses were already out of business,” said Ron Busby, president and chief executive of the U.S. Black Chambers. “We just couldn’t make it that long.”
Maurice Brewster is hanging on. He runs Mosaic Global Transportation, a California company that was growing quickly before the pandemic running the private buses that shuttled tech workers between their San Francisco homes and their suburban office campuses.
Those campuses have been all but empty since March, and many companies aren’t planning to bring workers back until next year. Other parts of Brewster’s business — providing transportation for conventions, wine tours and other events — are also suffering.
To survive, Brewster, who is Black, has slashed costs and sought new lines of business, including delivering packages for Amazon — “anything to get the vehicles moving and get some revenue coming in the door,” he said. Brewster says he is confident he can make it through the end of the year. After that, he doesn’t know.
“You just can’t go a year unless you have just an endless pool of money to sustain you until March or April of 2021,” he said. “A lot of us are going to go out of business.”
Economists say there is time to limit the damage. Despite a rocky start, the Paycheck Protection Program eventually paid out more than half a trillion dollars in loans and probably saved many businesses from failure, according to research from economists at the University of Illinois and Harvard. But the program lapsed in August, and if Congress doesn’t move soon to replace it, the earlier effort could end up delaying failures rather than preventing them.
Many experts still expect Democratic and Republican leaders to reach a deal on an aid package that includes support for small businesses, but a new, large-scale program seems increasingly unlikely.
“Why didn’t we use the time that PPP bought us to design the kind of program that would be commensurate with the national challenge that we’re facing?” Lettieri, of the Economic Innovation Group, asked. “That’s all PPP was. It was a mechanism to buy time. It was never the long-term solution.” A paycheck protection loan helped keep In-Symmetry Spa afloat early in the pandemic. But the money is long gone, and the San Francisco spa hasn’t been allowed to reopen. Nearby storefronts are boarded up, and Candace Combs, who has run the spa with her brother for two decades, said she doubted that many of those businesses were coming back.
“I can survive because I’m betting on another stimulus package,” Combs said. “But without that, we start to really teeter.”