Survival of small and medium enterprises during COVID

SME failures in the US

Bartik and al. surveyed 4.6 million small U.S. businesses during the period from March 28 to April 4, 2020. They gauged their expectation of remaining open in the event the crisis lasts for six months:

• Overall the average expectation of remaining open falls to 39 percent but there is significant heterogeneity between sectors;
• The expected survival probability for firms in Arts and Entertainment drops precipitously to 35 percent;
• The expected probability of being open for Personal Services firms falls to 19 percent;
• Restaurateurs gave themselves a 19 percent chance of survival;
• The chance of survival for firms in Tourism and Lodging drops to 25 percent by the 6-month mark;
• Banking and Finance, Real Estate and Professional Services reported they will be able to weather extended disruptions far better than these more exposed sectors.

Their analysis  offers insight for policy designed to aid the recovery: during liquidity crunches with significant cash flow disruptions, the form of cash injection (e.g. grant vs. loan) may be less important than making sure that funding is rapidly available with little administrative complexity.

The Impact of COVID-19 on Small Business Outcomes and Expectations
Authors: Alexander Bartik, Marianne Bertrand, Zoë B. Cullen, Edward L. Glaeser, Michael Luca, Christopher Stanton

SME failures in Europe

Gourinchas and al. estimate the impact of the COVID-19 shock on business failures, with a focus on small and medium-sized enterprises (SMEs). This is an issue of great concern for policymakers since a wave of SME failures, would severely hamper the efforts to contain the economic consequences of the pandemic. As a result,  the workers currently on temporary layoff or furloughed will instead become unemployed; banks will experience large losses on their C&I loan book; and the prospect of a financial crisis will increase significantly, with an increase in the associated fiscal costs. They use a simple partial equilibrium model of a firm’s short-run cost-minimization problem when faced with a rich combination of sectoral and aggregate, supply and demand shocks. Their analysis is limited to the following countries: Belgium, Czech Republic, Finland, France, Germany, Greece, Hungary, Italy, Japan, Korea, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, and the United Kingdom. They find:

• Absent intervention and with impaired access to credit markets – the rate of businesses failures for SMEs would almost double, increasing by 8.8 percentage points in 2020;
• These business failures would put a significant number of jobs at risk – about 3.1 percent of employment;
• But, they estimate only a modest impact on the financial sector, with the
  share of Non Performing Loans on bank balance sheets to increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio.