400,000 Small Businesses Closed Down in the 3 Months Starting March in the US — More Than Typically in a Year

From March through mid-July, over 420,00 small businesses – or 7.1% of all small businesses – permanently and quietly closed their doors, more than typically in an entire year, according to a study by Brookings, released in September.

The impact so far has been catastrophic. During the first two months of the crisis, from mid-March to mid-May 2020, more than 40 percent of all small businesses were closed. These closures caused revenues to plummet, down 40 percent on average. In leisure and hospitality revenues were down more than 70 percent. Businesses drew on what little cash they had to stay afloat. But by June, just three months into the crisis, more than 400,000 small businesses had already permanently closed—more than typically close in an entire year.

The analysis found that “many small businesses are financially fragile and not equipped to weather a prolonged period of substantially reduced revenues”:

• 47% rely on personal funds of the owner to fill a two-month revenue drop.
• 88% rely on the personal credit score of the owner (such as working capital funded by personal credit cards).
• Only 44% have had a bank loan over the past five years.

Small businesses account for about 99% of all businesses in the US and about 47% of jobs in businesses. If these 420,000 businesses are representative of national employment, “this means we have lost at least 4 million jobs that will only return with the creation of new businesses,” the report said.

Small businesses are prone to failure. But also many new small businesses are being created. This process of new businesses being created has now restarted strongly, but has been far outstripped by the tsunami of business closures. The report:

Even if for the remainder of the year losses simply keep pace with those in previous years, we will see a doubling of the ordinary annual rate of small business losses to more than 700,000 (or 12 percent).

That likely optimistic scenario would see around 50 percent more business losses than at the peak of the Great Recession, and the largest loss of small businesses since records began in 1977.

This speaks of the large-scale damage to American businesses. While some businesses massively benefited from the crisis, many more took on heavy damage; and of them, many already shut down, and more will shut down – most of them quietly, and only some with bankruptcy filings.

Source: Wolf Street