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Small Business Financial Outcomes during the Onset of COVID-19

The COVID-19 pandemic has affected every aspect of everyday life, from work to leisure. Even before a national emergency was declared on March 13, 2020, Americans began limiting their movements in an effort to contain the virus’s spread. In the weeks that followed, many states issued stay-at-home orders and closed nonessential businesses. Consumers cut their spending (Farrell, Greig, et al. 2020a) and shifted some of it online (Farrell, Wheat, et al. 2020).        

For many small businesses and their owners, this was an unprecedented adverse shock. The typical small business maintains cash reserves to cover about two weeks of outflows in the event of a total revenue disruption (Farrell, Wheat and Grandet 2019). Some small businesses were able to shift to alternative channels, such as online sales, and many were able to reduce expenses to offset the loss of revenue. Others temporarily closed.

This report provides a first look at the effect of COVID-19 and the ensuing economic downturn on America’s small businesses. We examine small business changes in cash balances, revenues, and expenses through April 2020 using a de-identified sample of nearly 1.3 million small firms nationwide. This sample is based on the anonymized transactions of deposit accounts and represents both nonemployer and employer firms. The vast majority—over 80 percent—of small businesses are nonemployers, which is reflected in our sample.

Together, cash balances, revenues, and expenses provide a summary of small business financial health. Balances provide the liquidity firms need, especially when they experience an adverse shock. Revenues and expenses indicate the amount of business activity, which may be reflected in cash balances. However, cash balances are not simply the net change in revenues and expenses: Business owners may also transfer personal assets or secure other financing to replenish their balances.

We examined these financial health measures for all firms in our sample, as well as by metro area, industry, and owner race. We found that while the entire small business sector has been negatively affected by COVID-19, there was wide variation in the magnitude of effects. In particular, we found:

  • Finding 1: Typical small business cash balances dropped 12.7 percent after the onset of COVID-19, but rebounded by the end of April.
  • Finding 2: Small business cash balances declined in every city, and most steeply in Atlanta, where balances decreased by 21 percent.
  • Finding 3: Small business cash balances and revenues declined across industries, with wide variation in the severity; restaurants and personal services were particularly hard hit.
  • Finding 4: Cash balances of Black-owned firms decreased by 26 percent, and revenues of Asian-owned firms declined by more than 60 percent.

Based on administrative data, our findings complement studies based on survey data and provide additional insights. In particular, we provide estimates of the effect of the national emergency on small business financial outcomes. It is not surprising that small businesses are enduring hardship, but these data quantify the magnitude and variation of the effects and inform policymakers of the metro areas, industries, and demographic groups more deeply impacted. For these small businesses, recovery may be even more challenging than it already is.


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