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Sep 1, 2020
News | Business | US: Small-Business Failures Loom as Federal Aid Dries Up
Many
owners face tough choices after a federal loan program and other
government moves to bolster the economy have run their course.
Credit...Jamie Cotten for The New York Times
The
United States faces a wave of small-business failures this fall if the
federal government does not provide a new round of financial assistance —
a prospect that economists warn would prolong the recession, slow the
recovery and perhaps enduringly reshape the American business landscape.
As
the pandemic drags on, it is threatening even well-established
businesses that were financially healthy before the crisis. If they shut
down or are severely weakened, it could accelerate corporate
consolidation and the dominance of the biggest companies.
Tens of thousands of restaurants, bars, retailers and other small businesses have already closed.
But many more have survived, buoyed in part by billions of dollars in
government assistance to both businesses and their customers.
The Paycheck Protection Program
provided hundreds of billions in loans and grants to help businesses
retain employees and meet other obligations. Billions more went to the
unemployed, in a $600 weekly supplement to state jobless benefits, and
to many households, through a $1,200 tax rebate — money available to
spend at local stores and restaurants.
Now that aid is largely gone, even as the economic recovery that took hold in the spring is losing momentum.
The fall will bring new challenges: Colder weather will curtail outdoor
dining and other weather-dependent adaptations that helped businesses
hang on in much of the country, and epidemiologists warn that the winter
could bring a surge in coronavirus cases.
As a result, many
businesses face a stark choice: Do they try to hold on through a winter
that could bring new shutdowns and restrictions, with no guarantee that
sales will bounce back in the spring? Or do they cut their losses while they have something to salvage?
For the Cheers Replica bar in Faneuil Hall in Boston, the answer was to throw in the towel after nearly two decades in business.
“We
just came to the conclusion, if we’re losing that much money in the
summertime, what’s the winter going to look like?” said Markus
Ripperger, president and chief executive of Hampshire House, the bar’s
parent company.
Many businesses that failed in the early weeks of
the pandemic were already struggling, had owners nearing retirement or
were otherwise likely to shut down in the next couple of years. Those
closing down now look different.
Cheers was a
longstanding, successful business with access to capital and owners
willing to invest to keep it going. But the bar, built to resemble the
one on the 1980s sitcom, depended heavily on tourist traffic that
collapsed during the pandemic.
The company’s three other
restaurants, which include the original Cheers bar on Beacon Hill that
was the inspiration for the show, remain in business. But Mr. Ripperger
said he was worried about what a winter resurgence of the virus might
mean.
Image
Credit...Kayana Szymczak for The New York Times
“We’re
on life support now, and if we have to go through another shutdown or
more restrictions, it’s going to be even worse for a lot more
restaurants that are just barely scraping by,” he said.
On Friday, the Commerce Department reported that consumer spending rose only modestly in July
after two months of resurgence and remained below pre-pandemic levels.
Economists warn that without the $600 a week in extra unemployment
insurance, spending is likely to slow further this fall.
Data from Homebase,
which provides time-management software to small businesses, shows that
roughly 20 percent of businesses that were open in January are closed
either temporarily or permanently. The number of hours worked — a rough
proxy for revenues — is down by even more during what should be the
year’s busiest period. Both figures have stalled or turned down in
recent weeks.
Small businesses have grown more pessimistic as the pandemic has dragged on. In late April, about a third of small businesses surveyed by the Census Bureau
said they expected it to take more than six months for business to
return to normal. Four months later, nearly half say so, and a further
7.5 percent say they do not expect business ever to bounce back fully.
About 5 percent say they expect to close permanently in the next six
months.
The ultimate damage could be much
greater. In a recent survey by the National Federation of Independent
Businesses, a small-business lobbying group, 21 percent of small
businesses said they would have to close if conditions did not improve
in the next six months. Other private-sector surveys have found similar
results.
Widespread business failures could cause lasting economic
damage. Nearly half of American employees work for businesses with
staffs under 500, meaning millions of jobs are at stake. And while new
businesses would inevitably spring up to replace those that close, that
process will take far longer than simply reopening existing businesses.
“The
consequences to allowing a tidal wave of closures is we will make every
aspect of the recovery harder,” said John Lettieri, president and chief
executive of the Economic Innovation Group, a Washington research
organization.
There could also be longer-run implications. Despite
high-profile bankruptcies in the retail industry and other sectors,
many large corporations have been able to solidify their position during
the pandemic: demanding concessions from landlords, borrowing billions
of dollars at low interest rates and leveraging sophisticated supply
chains and distribution systems to reach suddenly homebound customers.
Small businesses, which usually have less access to credit and rely more
heavily on foot traffic, have been struggling to survive.
Image
Credit...Jamie Cotten for The New York Times
The
challenge has been particularly acute for Black-owned businesses, which
were more than twice as likely to close down in the early months of the
pandemic than small businesses over all, according to research
from the Federal Reserve Bank of New York. Black-owned businesses were
more likely to be in areas hit hard by the virus, had less of a
financial cushion and were less likely to have established banking
relationships, which put them at a disadvantage in seeking loans under
the emergency Paycheck Protection Program in the critical first weeks
that the aid was available.
By the time they got access to the
federal money, “many Black-owned businesses were already out of
business,” said Ron Busby, president and chief executive of the U.S.
Black Chambers. “We just couldn’t make it that long.”
Maurice
Brewster is hanging on. He runs Mosaic Global Transportation, a
California company that was growing quickly before the pandemic running
the private buses that shuttled tech workers between their San Francisco
homes and their suburban office campuses.
Those campuses have
been all but empty since March, and many companies aren’t planning to
bring workers back until next year. Other parts of Mr. Brewster’s
business — providing transportation for conventions, wine tours and
other events — are also suffering.
To survive, Mr. Brewster, who
is Black, has slashed costs and sought new lines of business, including
delivering packages for Amazon — “anything to get the vehicles moving
and get some revenue coming in the door,” he said.
Mr. Brewster says he is confident he can make it through the end of the year. After that, he doesn’t know.
“You
just can’t go a year unless you have just an endless pool of money to
sustain you until March or April of 2021,” he said. “A lot of us are
going to go out of business.”
Economists say there is time to
limit the damage. Despite a rocky start, the Paycheck Protection Program
eventually paid out more than half a trillion dollars in loans and
probably saved many businesses from failure, according to research
from economists at the University of Illinois and Harvard. But the
program lapsed in August, and if Congress doesn’t move soon to replace
it, the earlier effort could end up delaying failures rather than
preventing them.
Many experts still expect Democratic and
Republican leaders to reach a deal on an aid package that includes
support for small businesses, but a new, large-scale program seems
increasingly unlikely.
“Why didn’t we use
the time that P.P.P. bought us to design the kind of program that would
be commensurate with the national challenge that we’re facing?” Mr.
Lettieri, of the Economic Innovation Group, asked. “That’s all P.P.P.
was. It was a mechanism to buy time. It was never the long-term
solution.”
A paycheck protection loan helped keep In-Symmetry Spa
afloat early in the pandemic. But the money is long gone, and the San
Francisco spa hasn’t been allowed to reopen. Nearby storefronts are
boarded up, and Candace Combs, who has run the spa with her brother for
two decades, said she doubted that many of those businesses were coming
back.
“I can survive because I’m betting on another stimulus package,” Ms. Combs said. “But without that, we start to really teeter.” Jim Tankersley contributed reporting.
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