Why small businesses tend to get the short end of the stick of any economic downturn

Whether in a recession or any activity increasing the cost of business, small businesses tend to suffer the worst of it.In the current pandemic the trend is the same; small businesses, especially service establishments, have experienced more job and business losses. A big proportion of small business have gone completely out of business and will not be opening back once the shutdown is over.

A current research paper by NBER after conducting a survey on more than 5,800 small businesses found the following:

First, mass layoffs and closures have already occurred. In our sample, 43 percent of businesses are temporarily closed, and businesses have – on average – reduced their employee counts by 40 percent relative to January. Second, consistent with previous literature, we find that many small businesses are financially fragile. For example, the median business has more than $10,000 in monthly expenses and less than one month of cash on hand.

What makes the corona virus worse for small businesses is the uncertainty. Generally most establishments have wide varying beliefs about the duration of the economic shutdown. This inherently hurts their planning, and makes the outlook bleaker than it would otherwise be.

Why small businesses suffer 

Small businesses have a small cash buffer (number of days a business can continue paying its outflows without bringing money in). On average most small business can only cover a little less than a month of expenses without revenue.  Any occurrence therefore that increases costs or cuts at their revenue source is bound to affect their financial stability. The corona virus has completely cut off revenue for some businesses, and greatly diminished it for others, impacting their survival.

Before businesses were informed of the CARES act, many were unsure of whether they will be able to weather the storm, showing the extent of the damage which they had faced. That threat is of course gone for many small businesses but for those who chose not to apply due to the difficulty of the process they still face the risk of closing. Same to those who won’t be able to secure funding since the program has run out of funds.