Small Business Economic
December 10, 2020
The Impact of the COVID-19
Pandemic on Small Businesses
The Biz2Credit Small Business Economic Indicator study is a proprietary analysis of financial data gathered from over 11,000 small businesses who have applied for financing on the Biz2Credit funding platform. In 2020, the study shows the effects of the COVID-19 pandemic on the economic health and viability of small companies (under 500 employees) in the United States over the 6-month period from March through September, 2020. The study shows that the Paycheck Protection Program and other business relief efforts by the government had a large but temporary effect on business performance and survival.
Since the Paycheck Protection Program (PPP) expired in August 2020, many companies are operating at a negative cash flow and up to 30% could close forever by the end of 2020.
The Biz2Credit Small Business Economic Indicator Study is based on proprietary data taken directly from the financial transactions of tens of thousands of small businesses with Biz2Credit’s Bank Statement Analyzer technology. Using advanced AI/machine learning to identify week-by-week revenue, expenditure, profit margins and other SMB cash flow trends, the study identified trends along different dimensions, including industry sector, region, and PPP funding outcomes. The analysis compares detailed cash flow data in the pre-coronavirus period (January and February) and the first six months of the pandemic (March – October) 2020. The data was collected from nearly 11,000 small businesses across the country in all industry sectors when companies applied for funding via the company’s online financing platform.
The study examined proprietary credit and cash flow information gathered directly from anonymous financial transactions made by financing applicants, as well as survey results from a random sample of business owners surveyed during the summer. In examining the impact of COVID-19 on small businesses, Biz2Credit identified five critical phases of the COVID-19 pandemic’s impact on small business owners:
Biz2Credit Small Business Revenue Index (Feb. Rev = 100, 4Wk Mov. Avg.)
We expected revenues to be down. However, sales sunk even lower after PPP expired. Meanwhile, costs are accelerating faster than revenues and the enhanced unemployment benefits dried up in late summer. Many companies are operating at a loss right now, and they cannot sustain it long-term. With the potential of further lockdowns because of COVID’s second wave, I fear that more than 30% of small businesses could go bankrupt in the next six months.
The median small business is experiencing negative cash flow margin (June 24 – Oct. 6) which means they are spending more than they are earning each week.
Initially, the Northeast and Midwest were hit the hardest economically by COVID, while small businesses in West and South were relatively less impacted. All regions are weakening in the post-PPP Stage 5.
About 60% of businesses closed due to COVID-19 at some point. Companies that closed experienced an 87% drop in revenue compared to 2019.
In Stage 1 of the pandemic, 5.4% of small businesses experienced at least one week of zero revenue. By Stage 2, that number jumped to 8.3%. During Stage 5, the number leveled off to 7.5%.
Expenditures on personal protection equipment (PPE) resulted in a 15-point reduction in gross margins on average. Businesses report investing approximately $29,230 in PPE and renovations to deal with COVID-19.
Restaurants are even worse off; they spend approximately 78% more on PPE than other businesses, shelling out $52,106 on average.
The average revenue for restaurants is down 72% and, surprisingly, the average number of online orders or takeout orders was down 38%. That's compared to the 52% decline for other types of businesses (thus, a 20-point deficit for restaurants).
Only 20% of businesses were offered rent or mortgage deferrals by their landlord or mortgage company, despite pleas from local government officials,such as New York Mayor Bill de Blasio, to give business owners a break. Many of those that offered payment allowances during the worst months of the pandemic looked to make up for their lost revenue as counties reopened.
Average cost of recovery (PPE + renovations) was $21,553 for businesses that were closed due to COVID-19
Government cash relief has had varying impact on cash coverage weeks by industry sector. The infusion of money from the PPP and SBA loans had the greatest impact on Retail Services and Healthcare and Social Services organizations. The funding had less impact on Food & Accommodation, B2B Services, and Retail Trade.
SBA relief has raised cash coverage to 3 months from just ½ month. However, only about 30% of this amount is from the PPP, while the other 70% of the impact was driven via the SBA Economic Injury Disaster Loans (EIDL) program, indicating that EIDL may have afforded businesses more staying power than PPP alone.
Greg Kowalczyk is owner of Fabio’s Bistro in Fanwood, New Jersey. The restaurant saw a surge of orders being sent to local hospitals during the height of the crisis in March and April. But his restaurant is no longer getting the same number of large catering order as the pandemic has gone on.
It was a perk for a few weeks when these big orders would come in, as people in the community collected money specifically to provide meals for front line workers at hospitals during the height of the pandemic.Greg Kowalczyk, owner of Fabio’s Bistro in Fanwood, New Jersey
Donors were extremely generous and eager to help, but those types of orders have tailed off as the COVID-19 numbers improved in New Jersey. The big catering orders for the healthcare workers went on longer than anticipated, but now have tailed off.Greg Kowalczyk, owner of Fabio’s Bistro in Fanwood, New Jersey
Differential impact across industry sectors:
Accommodation and Food Services remain the hardest hit. Construction, IT, Wholesale Trade, Manufacturing, Transportation and Warehousing have been the most resilient. Retail has recovered the most from early pandemic impact.
The PPP had a large, but short-lived effect:
The CARES Act’s PPP lending gave a significant boost to the cash flow of small businesses when it was received and kept millions of companies from going bankrupt between April and August. However, the PPP has been a one-time event, and its impact on overall business health appears to be limited unless the program is extended again.
Lawmakers in Washington must enact new stimulus plans fast:
Unlike large corporations that can access capital markets, small businesses must carefully monitor revenue and adjust costs in direct relation to their cash inflows. Many small businesses have been operating at a negative cash flow for months and may not hold on much longer
About Biz2Credit Founded in 2007, Biz2Credit has arranged more than$3 billion in small business financing. The company is expanding its industry-leading technology in custom digital platform solutions for banks and other financial institutions, investors, and service providers. Visit www.biz2credit.com or Twitter @Biz2Credit, Facebook, and LinkedIn.