Fed Report: Small-Business Sector Highly Vulnerable to Coronavirus Crisis
April 07 2020 - 2:16PM
Dow Jones News
By Michael S. Derby
Even the best-managed small businesses are in a very vulnerable
position as they try to weather the shutdown of much of the U.S.
economy during the coronavirus crises, according to the Federal
Reserve Bank of New York.
A report released Tuesday by the bank said that among "healthy"
small businesses, about 20% of them have enough cash saved to
operate normally for two months if their revenue were to dry up.
Among less financially secure companies, only 10% could operate
normally on savings alone for two months.
The report said that if small firms were forced to cut back,
healthy firms would most likely cut staff or pay, while troubled
firms would more likely try to borrow to stay in business.
The New York Fed report defines small businesses as those with
fewer than 500 workers. Its findings were based on a national
survey done in late 2019, in conjunction with the other 11 regional
Fed banks.
The bank noted that many firms were already struggling going
into the coronavirus crisis: Nearly two-thirds of respondents said
that over the prior 12 months they had faced problems such as
struggling to pay for operating expenses, including payrolls, or to
line up needed credit.
"The data underscore that while small firms reported a strong
end to 2019, many continued to deal with financial challenges, and
even the healthiest of firms could face tough decisions amid a
sustained loss in revenue," Claire Kramer Mills, an executive vice
president at the New York Fed, said in the report.
She said the report's findings can help the government aid
business in the current crisis. "By shedding light on the channels
through which firms may seek financial recourse, the data can
inform the design of new loan and grant programs and offer insights
on how to reach businesses in need,"
The report also affirmed a long-running truth about small
businesses: Borrowing that is available to large companies is less
accessible for more modest size firms. Despite a year that saw
rising revenue and increased hiring at small businesses, the New
York Fed report said that just under half of survey respondents got
credit from a bank in 2019, with less half reporting any bank
credit at all in the past five years.
The report also noted a stark racial disparity in who accessed
credit. Only 23% of companies with non-Hispanic-black ownership
lined up a bank loan, for example, compared with 46% of small firms
owned by non-Hispanic whites.
The government's economic response to the coronavirus crisis
first targeted financial markets before extending support to other
parts of the economy, be they small firms or households. On
Tuesday, Senate leader Mitch McConnell (R., Ky.) said he would try
to get more funding for the congressional program extending loans
to small businesses.
On Monday, the Federal Reserve said it was creating a new
program that would finance loans channeled through the government's
emergency small-business lending program.
Meanwhile, the National Federation of Independent Business said
Tuesday that its March Small Business Optimism Index booked a
record monthly decline of 8.1 points, falling to 96.4. In a
statement, NFIB Chief Economist William Dunkelberg said "it is
vital that these businesses have access to federal funds that are
made available through the CARES Act to keep the doors open on Main
Street."
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
April 07, 2020 14:01 ET (18:01 GMT)
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