Question

select a small business in your community that has been started by an entrepreneur. (Note: you may even select a small family business). Provide a summary of the key features of this business. Are there any obstacles to growth? What is the entrepreneur doing to ensure profitability and address risk? Explain fully and comment on classmates' responses.

PLEASE ADDRESS THIS IN LIGHT OF THE IMPACT OF CORONAVIRUS ON SMALL BUSINESS.

Answer 1

Drawing on a survey of more than 5,800 small businesses, this paper provides insight into the economic impact of coronavirus 2019 (COVID-19) on small businesses. The results shed light on both the financial fragility of many small businesses, and the significant impact COVID-19 had on these businesses in the weeks after the COVID-19–related disruptions began. The results also provide evidence on businesses’ expectations about the longer-term impact of COVID-19, as well as their perceptions of relief programs offered by the government.

The results suggest that the pandemic had already caused massive dislocation among small businesses just several weeks after its onset and prior to the availability of government aid through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Across the full sample, 43% of businesses had temporarily closed, and nearly all of these closures were due to COVID-19. Respondents that had temporarily closed largely pointed to reductions in demand and employee health concerns as the reasons for closure, with disruptions in the supply chain being less of a factor. On average, the businesses reported having reduced their active employment by 39% since January. The decline was particularly sharp in the Mid-Atlantic region (which includes New York City), where 54% of firms were closed and employment was down by 47%. Impacts also varied across industries, with retail, arts and entertainment, personal services, food services, and hospitality businesses all reporting employment declines exceeding 50%; in contrast, finance, professional services, and real estate-related businesses experienced less disruption, as these industries were better able to move to remote production.

Our results also highlight the financial fragility of many businesses. The median firm with monthly expenses over $10,000 had only enough cash on hand to last roughly 2 wk. Three-quarters of respondents only had enough cash on hand to last 2 mo or less.* Not surprisingly, firms with more cash on hand were more optimistic that they would remain open by the end of the year.

Our survey also elicited businesses’ beliefs about the evolution of the crisis, allowing us to study the role of beliefs and expectations in decisions. The median business owner expected the dislocation to last well into midsummer, as 50% of respondents believed that the crisis would last at least until the middle of June. However, beliefs about the likely duration of the crisis varied widely. This raises the possibility that some firms were making mistakes in their forecasts of how long the crisis will last.†

The crisis duration plays a central role in the total potential impact. For a crisis lasting 4 mo instead of 1 mo, only 47% of businesses expected to be open in December compared to 72% under the shorter duration. There is also considerable heterogeneity in how sensitive businesses are to the crisis. In-person industries like personal services or retail reported worse prospects for riding out the pandemic than professional services or other sectors with minimal need for face-to-face contact.

Lastly, our analysis explores variants of stimulus packages that were being discussed at the time of the survey. The results show that over 70% of respondents anticipated taking advantage of aid when asked about a program that resembles the Paycheck Protection Program (PPP) that is part of the CARES Act. Moreover, they expected this funding to influence other business decisions—including layoff decisions and staying in business altogether. At the same time, many businesses were reluctant to apply for funding through the CARES Act because of concerns about administrative complexity and eligibility. A large number of respondents also anticipated problems with accessing the aid, citing potential issues such as bureaucratic hassles and difficulties establishing eligibility.

Our survey was constructed to allow for a counterfactual evaluation of a straight loan policy, which is a stylized representation of traditional Small Business Administration disaster relief programs. While the more generous PPP program does improve take-up and business outcomes, traditional loans with speedy delivery and sufficient liquidity are also found to meaningfully shift business owners’ expectations about survival. When compared to a straight loan without forgiveness provisions, the CARES Act had modestly greater take-up, but at much higher cost to the government. Because the majority of business owners would have taken up aid in the form of less generous loans, our results suggest that liquidity provision was paramount for these owners.

Overall, our paper contributes to our understanding of the economic impact of COVID-19 on the small business ecosystem. The fate of the 48% of American workers who work in small businesses is closely tied to the resilience of the small business ecosystem to the massive economic disruption caused by the pandemic. Our survey was conducted during a period of substantial policy uncertainty and before any federal response had been enacted. Our results provide a unique snapshot into business decisions and expectations at that time, while offering insight for policy designed to aid the recovery. Our results highlight the role the length of the crisis will play in determining its ultimate impact, which policy makers should consider as they contemplate the scale of the required interventions. We estimate that closures alone might lead to 32.7 million job losses if the crisis lasts for 4 mo and 35.1 million job losses if the crisis lasts for 6 mo. While some of these workers will surely find new jobs, these projections suggest that the scale of job dislocation could be larger than anything America has experienced since the Great Depression and larger than the impact of the 1918 influenza epidemic (6⇓–8). Another important take-away of our work is that, during liquidity crunches with significant cash flow disruptions, the form of cash injection (e.g., grant vs. loan) may be less important than making sure that funding is rapidly available with little administrative complexity.