The COVID-19 Pandemic’s Threat to Small Business

Article #3 in a series exploring the business world’s response to the COVID-19 crisis. This series was inspired by the America Reopens Handbook, which was created by the BizBreakthru team and is available to members.  

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At the beginning of our last article, we asked whether COVID-19 was a crisis, but although we defined a crisis, we did not formally answer the question.

We settled on a definition of a crisis based on Charles Hermann’s three basic conditions:

  1. It threatens high priority values of the organization goals
  2. It presents a restricted amount of time in which a decision can be made
  3. It is unexpected or unanticipated by the organization

Now let’s look at the data. The data on COVID-19’s business impact are still coming in of course, but here’s what the Federal Reserve has found so far for small businesses:

Note that the Fed first “looked at firms’ financial health in 2019, focusing on profitability, credit risk, and business funding. Among these three facets, [they] categorized ‘healthy‘ firms as those that are profitable, have higher credit scores (low credit risk), and use retained business earnings to fund the business. Firms that meet only two of these criteria are ‘stable,’ one of these criteria are ‘at risk,’ and none of these criteria are ‘distressed.'”

From these data, the Fed has concluded that “smaller firms, younger firms, and firms with black or Latino owners were more likely to show signs of limited financial health. It is important to note that firms helmed by black or Latino owners face structural barriers that influence their business’ financial health.

As to how businesses are responding to this threat, the Fed also shared the following:

Actions firms would take to respond to a 2-month revenue loss

So overall, we may conclude the following, understanding of course that we have already reached the two-month revenue loss point:

  • 6% of firms faced an immediate existential threat the moment the crisis began and cash flow began dropping
  • 30% of “distressed” companies are currently at risk of closing (two months in to the crisis)
  • 28% of “at risk” companies are currently at risk of closing (two months in to the crisis)

Even supposedly “stable” and “healthy” companies are facing an existential threat: roughly 17% of “stable” companies are at risk of closing, and even some 8% of otherwise “healthy” companies face the same prospect. If you’re doing the math: more than 80% of small businesses are currently facing an existential threat for which closure is an option under consideration. For these businesses, ceasing business operations is “on the table” and quite possibly being discussed. 

These companies face an unexpected threat to their core business that requires a rapid response — the three requirements of a crisis. 80% of small businesses are currently facing a COVID-19 crisis.

We’ll share some more data, and explore what companies are and aren’t doing to prepare for threats like COVID-19, in the next few articles.

Is your company currently facing an existential threat? Let us know! Share your comments below!

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