The pandemic may have caused 200,000 business closures – fewer than expected

Store closed coronavirus
A store closure in New York.

  • A Fed survey found that 200,000 extra US businesses have permanently closed in the past year.
  • That’s on top of the estimated 600,000 businesses that close in a given year.
  • Small businesses were not hit as hard as expected, which could be because of government aid.
  • See more stories on Insider’s business page.

In recent years, Federal Reserve economists have estimated that 600,000 US businesses have permanently closed each year. But a Fed study released on Thursday found that the pandemic has resulted in an additional 200,000 permanent closures of businesses over prepandemic levels – or about a quarter to a third above normal.

Individual companies account for about two-thirds of the closures, while personal service providers, like hair and nail salons, were the hardest hit, accounting for 100,000 permanent closures between March 2020 and February 2021.

“Business exit implies permanent job destruction, potentially detaching workers from the labor market and limiting the speed of the employment recovery,” the study said.

The study also said that small businesses had lower exit rates than expected from early on in the pandemic, and while the Fed economists did not provide a reason for this in the study, many small businesses have managed to stay afloat with the help of government aid.

The expectations early in the pandemic were dire for small business. For instance, the National Federation of Independent Business found in a July survey that 23% of small businesses expected to be closed within six months unless economic conditions changed.

Government aid may have accounted for some of this upside surprise. Insider reported on March 16 that most small businesses continued to pay their bills during the pandemic through the Paycheck Protection Program, which gives loans to small businesses.

On top of stimulus aid, Biden’s infrastructure plan could also help mitigate the toll the pandemic has had on US businesses. The president proposed a $400 billion investment to strengthen and protect America’s businesses, which would encourage and promote domestic production of goods.

But the aid can only last so long, and The Wall Street Journal reported that businesses that have not yet permanently closed could soon collapse under the burdens of back rent and unpaid loans.

Insider also reported on Friday that the situation remains challenging for businesses that are open – they’re struggling to hire because of a labor shortage caused by a number of things, including unemployment benefits disincentivizing people to work and fear of contracting COVID-19.

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Most small businesses kept paying their bills during the pandemic. Experts say that can only last so long.

small business owner
Ralph Mercier, owner of Mercier’s Salon, pauses from hanging up snowflakes in the window of his business in downtown Calais, Maine.

  • Government support has helped small businesses pay their bills during the pandemic, a report finds.
  • Aid programs including the PPP and lender forbearance, along with reduced payrolls, have kept businesses afloat.
  • But experts say that while stimulus aid is a start, relief needs to be more targeted in the future.
  • See more stories on Insider’s business page.

The coronavirus recession hit small businesses hard. However, with the help of small business lending programs and government funding, many businesses managed to continue making their payments, with credit in good standing.

A report released on Tuesday from the Urban Institute, a left-leaning think-tank, found that despite significant revenue losses for small businesses in the past year, government support, reduced payrolls, and lender forbearance have helped those businesses continue paying their bills. Using data from businesses in Chicago, Detroit, Houston, New Orleans, New York, San Francisco, Seattle, and Washington, DC, the report found that while debts owed by small businesses have increased slightly since 2020, most have been able to keep up to date on payments.

“Our new evidence shows that the pandemic’s effects have largely not – or at least not yet – translated into dramatically higher delinquencies or defaults among small businesses,” the report said.

Nationwide, past-due payments or debts owed by small businesses have increased from 17.7% in February 2020 to 18.3% in January 2021, and the report said that while some businesses in the eight cities were more affected than others, differences “in business delinquency from city to city outweigh any effects observed since the pandemic.”

How businesses have paid their bills

Womply data found that revenues for small businesses are down 38% from pre-pandemic levels, while JPMorgan Chase reported that revenues are only down 9% from pre-pandemic levels.

Brett Theodos, a senior fellow at the Urban Institute and researcher on the report, said that given the disparate numbers on the revenue data, there isn’t a definitive answer yet on how much revenues are really down, but “there is a revenue hit regardless of what that number is.”

Despite the losses, those businesses have continued to stay afloat with the help of government-provided aid.

The Urban Institute report found that the Paycheck Protection Program – which lawmakers are now pushing to extend past March 31 – has factored into small businesses maintaining a strong credit standing due to the aid provided since the start of the pandemic.

And in President Joe Biden’s $1.9 trillion stimulus plan signed into law on Thursday, $50 billion was set aside for small business aid, including $7.25 billion specifically for the PPP.

In addition, the report said that many businesses have shrunk their costs during the pandemic by cutting payrolls, and they have also benefitted from flexibility granted from creditors and landlords.

“The combined result of these three forces-PPP support, cost reductions, and forbearances-has been a significant growth of cash holding for small businesses, rising by more than 41 percent before tapering modestly after its peak in August 2020,” the report said. “On average, small businesses have also been able to maintain strong credit standing because of these same forces.”

Continued support through policy is needed

While cutting payrolls and making other accommodations have helped small businesses survive in the past year, the report said that doing so is painful for the businesses and will constrain their future growths.

“Small businesses’ abilities to maintain payments on average does not imply that all businesses and owners are doing well,” the report said.

$300 weekly unemployment benefits were extended through September under Biden’s stimulus, and the benefits, along with the additional PPP funds, will help people and businesses get by financially.

Theodos noted issues with the first round of the PPP, during which the businesses who truly needed the aid were not appropriately targeted, and he suggested that when looking toward future aid for small businesses, policies should ensure aid is being equitably distributed.

“Let’s find those businesses that really need to help,” Theodos said. “Let’s support entrepreneurial ecosystems where they’re not well developed, let’s help de-risk loans that really are high risk, let’s overcome the race equity gap that exists and business ownership in this country, and let’s be more intentional around our targeting.”

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