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Coronavirus is forcing 100,000 small firms out of business? That needs a closer look

By May 24, 2020No Comments

(This post originally appeared on The Guardian)

About 100,000 small businesses are projected to have permanently shut their doors since the coronavirus outbreak was declared in March, according to a new study from economists at the University of Illinois, Harvard University and the University of Chicago.

“Overall, our results suggest that the pandemic has already caused massive dislocation among small businesses,” the authors of the study, which surveyed 5,800 business owners, concluded.

Think about that: 100,000 businesses shut permanently after being out of business for just two months. Two months! Does that seem a little odd to you? It does to me. So before we push the panic button, maybe a little more analysis is needed.

According to the Small Business Administration, there are about 30.2m small businesses in the US, of which 5.9m actually have employees. So although 100,000 firms going out of business is a sad thing, it could be considered a relatively small number – 0.3% of all businesses, or less than 2% of all employer-owned firms. But here’s another interesting fact: the SBA also reports that anywhere from 7% to 9% of those 5.9m employer firms actually go out of business every year. Breaking it down, that comes to as many as 531,000 failed firms annually or 88,500 over two months.

So are the 100,000 businesses that are discussed in the survey shutting down specifically because of coronavirus? Maybe. Or perhaps it’s because many of them would’ve shut down anyway? No one can really say for sure. Respondents in the study say “coronavirus” is the cause. But I’ve worked with countless small business owners and if there’s one thing I’ve learned it is that many of us are just people and we oftentimes come to different conclusions even on the same set of facts.

But let’s stick to the coronavirus theory for all those businesses shutting down. If we go on the conclusion that 100% of the 100,000 businesses projected to close are shutting their doors specifically because of the pandemic, then that raises another big question: why? Why after only two months?

This situation is certainly very difficult for many of us. We’ve all been suffering economically. But to permanently shut the doors after only two months of an economic downturn? That to me says more about the businesses that are still in operation than anything else. They just seem to be managed better.

Even the study’s authors admit that many of the small businesses they surveyed were already “financially fragile”. They found that the median small business had only about one month of cash on hand and that although the majority of small businesses planned to seek funding through the Cares Act, “many anticipated problems with accessing the aid, such as bureaucratic hassles and difficulties establishing eligibility”.

Here’s what I see among my client base and the many small business owners I engage with every week.

I see that most will emerge from this pandemic, although very much bruised. I see that the ones that do emerge have survived because they had sufficient cash in the bank to navigate through the ups and downs of ownership. These people have always stayed within their means and always run their businesses in a manner that appropriately balances risk with taking too many chances.

What about the Cares Act? Yes, the process for getting paycheck protection and other government help has been a hassle for many. But more than 4m loans have been extended so far and there’s more money still there. Who received these loans? I know who. They were the business owners who started the application process early, learned the rules, understood the details, provided the right documentation and aggressively followed up with their lenders until they got their money.

I bet that’s the way they are with their businesses too. Those same business owners have probably carried on with new ways to make money and cover their costs, be it by additional delivery services and an expansion of their online sales. For sure, they’re paring down inventory, cutting overhead expenses, creating new partnerships and pivoting from unprofitable product lines to focus more on the ones generating the cash … or even new items to sell.

So maybe the 100,000 businesses that are shutting their doors are doing so completely and totally because of the coronavirus. Or maybe they would have gone out of business for other reasons anyway. Or maybe they would’ve stuck around a little longer despite their management flaws and buoyed by a strong economy. But in the end, the business owners who are innovative, conservative, have cash, tenacity and a long-term outlook are always the stronger ones. They’re also always the ones that survive economic downturns, regardless of the reason.

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