Impact of COVID-19 on Small Businesses

The COVID 19 crisis has led to an unprecedented impact on the entire world economy. About half the world’s population is locked up. The high streets are running empty, and in many businesses, the sales are close to zero. Even multinational companies whose balance sheets are worth billions of dollars are having a hard time surviving this crisis. Hence, the fact that small business owners are finding it hard to survive is no surprise at all. Online surveys have been conducted amongst small business owners, and the results are no less than terrifying. More than half of these owners think that their business will not survive the downturn! This is concerning not only for the small business owners but for the economy as a whole because these businesses are the backbone of any economy.

In this article, we will first understand the impact that the coronavirus crisis is having on small businesses. Then, we will try to understand the various measures which the United States government is taking to help small businesses weather this storm.

Impact of COVID-19 on Small Businesses

The business issues which small businesses face are somewhat similar to those being faced by large businesses. However, the magnitude of these problems is much larger, and this is what makes the effect devastating.

  • No Consumer Demand: Most small businesses make products that involve discretionary spending. This is the reason why the dentist’s office and the neighborhood bakery are not likely to see any demand for some time.

    Firstly, the government has introduced lockdowns, and hence it is illegal to open the business for service. However, even after the businesses do open, they are not likely to see a lot of consumer demand for some time. This is because people will be afraid to step out of their house and go to restaurants and shops for some time because the fear of coronavirus will long after the virus has vanished.

  • Cash Flow Issues: Big businesses can survive even without making sales for some time. This is because they usually have the cash flow available or can raise funds from investors. This is not the case with small businesses.

    Online surveys have suggested that about a third of small businesses do not have the spare cash flow to survive for more than a month, and more than three-quarters of the businesses do not have the cash flow to survive for three months without any cash inflow. Also, small businesses are much less likely to see cash inflow in the form of loans. This is because there will be a credit squeeze, and hence banks will be picky with regards to who they lend money to. Given the limited amount of money at hand, they would prefer to lend to the more creditworthy corporates instead of vulnerable small businesses.

  • Workforce Issues: Small businesses are reliant on different types of labor. These include factory workers, accountants, chefs, etc. A lot of these workers have migrated back to their home towns because of the coronavirus crisis. Even after the restrictions are lifted, small businesses might find it difficult to manage their businesses with less labor. Also, the availability of fewer workers in the market would mean higher prices, which would definitely impact the already wafer-thin profit margins of these businesses.

Relief Measures Offered By the United States Government

The $2 trillion relief package being offered by the United States government is not aimed only at big businesses. Efforts have been made to formulate policies that specifically help small businesses. Some of these policies are as follows:

  • The United States government is offering loans up to $1 million or 2.5 times the monthly expenses of the business, whichever is lower. These loans will be granted on concessional terms.

    For instance, the loans will be provided at a nominal 1% interest. The loans will cover expenses such as rent, employee wages, paid leave, healthcare benefits for employees, etc.

    Also, the small business owner will not have to provide any collateral in order to avail of these loans. The loans will also provide a moratorium for six months to ensure that small businesses do not feel any additional pressure during the peak of the coronavirus crisis.

    The loans do not have any prepayment penalties. Hence, small business owners can borrow money in order to be on the safer side and can return the loans once their cash flow returns to normal.

    The United States government places very little restriction on the way the proceeds will be spent as long as small businesses are using them to buy American products and pay American employees.

    In fact, these types of loans are called payroll protection loans and can be partially or completely forgiven if the small business is able to demonstrate that the money was spent on payroll.

  • The United States government is also offering other loans called the Economic Injury Disaster Loans (EIDL). These loans are being offered at a slightly higher interest rate of 3.25%.

    The loans can be taken up to $10000 for working capital and up to $2 million in total. These loans are available to businesses with less than five hundred employees and will be disbursed in three or four business days.

The bottom line is that the United States government is taking due measures to prevent small businesses from ending up in crisis. It is important for other governments all over the world to also follow suit.

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