Small business used to define America’s economy

Small business used to define America’s economy. The pandemic could change that forever.

More than 100,000 small businesses have closed forever as the nation’s pandemic toll escalates.

The coronavirus pandemic is emerging as an existential threat to the nation’s small businesses — despite Congress approving a historic $700 billion to support them — with the potential to further diminish the place of small companies in the American economy.

The White House and Congress have made saving small businesses a linchpin of the financial rescue, even passing a second stimulus for them late last month. But already, economists project that more than 100,000 small businesses have shut permanently since the pandemic escalated in March, according to a study by researchers at the University of Illinois, Harvard Business School, Harvard University and the University of Chicago. Their latest data suggests at least 2 percent of small businesses are gone, according to a survey conducted May 9 to 11.

The carnage has been even higher in the restaurant industry, where 3 percent of restaurant operators have gone out of business, according to the National Restaurant Association.

Tearful, heartfelt announcements about small-business closures are popping up on websites and Facebook pages around the country. Analysts warn this is only the beginning of the worst wave of small-business bankruptcies and closures since the Great Depression. It’s simply not possible for small businesses to survive with no income coming in for weeks followed by reopening at half capacity, many owners say.

The result is likely to further shift the balance of power — and jobs — toward big businesses that have a better chance of surviving the uncertain year ahead by borrowing money or drawing on large cash reserves. Emergency actions by the Federal Reserve, backed by the Treasury, have made borrowing money almost free for large companies.

“We are going to see a level of bankruptcy activity that nobody in business has seen in their lifetime,” said James Hammond, chief executive of New Generation Research, which tracks bankruptcy trends. “This will hit everyone, but it will be harder for small businesses since they don’t have a lot of spare cash.”

While 4.2 million businesses have received emergency loans from the Small Business Administration, it’s a fraction of the 30 million small firms in the nation. Many small-business owners say Congress’ financial rescue isn’t designed well to help very small businesses, known as micro firms, that have large overhead costs such as rent.

“It wouldn’t be surprising if well over 1 million of these micro firms ultimately fail,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a recent note to clients, referring to firms with fewer than 10 employees.

In the 1980s and 1990s, small businesses employed over half of American workers, but that dynamic has shifted over time. By 2017, only 47 percent of private-sector employees were at small businesses, and the pandemic appears to be reducing that again.

In April, smaller firms had substantially more layoffs than larger ones, according to payroll processor ADP, an early warning sign.

Losing small businesses often creates a ripple effect in communities, especially smaller towns where little shops and restaurants remain the lifeblood of Main Street. These business owners often depend on each other, meaning as some shutter forever, it can trigger more to follow.