Many small businesses were struggling with funding shortfalls and financial challenges even before the coronavirus pandemic hit, leaving them with little cash on hand to weather the slowdown caused by the virus, according to data released by the Federal Reserve on Tuesday.
Many small firms, particularly the smallest businesses and those owned by black and Hispanic entrepreneurs, also lack traditional banking relationships, which could make it more difficult for them to receive financial assistance during the crisis.
"Small businesses nationwide now face unprecedented challenges as the country grapples with the significant economic and social effects of the COVID-19 pandemic," Claire Kramer Mills, assistant vice president at the New York Fed, said in a statement.
The majority of small employers reported growing revenue last year and more than a third even expanded their staffs, according to the 2019 survey of more than 5,500 small firms issued by the 12 Federal Reserve Banks.
However, two-thirds of the businesses said they faced financial challenges last year, according to the report, which focused on businesses with fewer than 500 employees.
In a supplemental brief, researchers at the New York Federal Reserve assessed the ability for small businesses to cope with a substantial hit to revenue, categorizing firms according to their financial health - a metric based on their profitability, credit scores and earnings. Among the "healthy" firms, only about 20% had enough cash saved to continue operating as normal after losing two months' worth of revenue.
Most small businesses surveyed by the Fed said they would have to shrink their staffs, delay payments or scale down operations after taking such a hit. Many firms would need to go into debt or turn to personal funds to close the gap.
That hypothetical scenario - two months without revenue - posed to businesses owners at the end of last year is now a reality for many firms, which closed down or substantially reduced their operations because of nationwide efforts to contain the spread of the coronavirus.
A new $349 billion small business bailout fund launched last week to shore up businesses with fewer than 500 employees got off to somewhat rocky roll out last week after some banks grappled with unclear rules and inconsistent government infrastructure. Some banks initially said they were prioritizing existing customers, putting some small business owners at a potential disadvantage for the first-come, first-served program.
Only 44% of small businesses had turned to a bank for a loan in the past five years and just 6% had turned to a credit union, according to the Fed survey. Businesses with more than $1 million in annual revenue and those with white owners were more likely to have used banks for funding, while smaller businesses and those with black or Hispanic owners were more likely to have used online lenders.
© 2022 Thomson/Reuters. All rights reserved.