U.S. records 200,000 small business closures due to pandemic

It has been estimated by the Federal Reserve that last year there were 200,000 small business closures that can be attributed directly to the global pandemic. Whilst this looks like a bleak figure (and it is), it still is not as bad as feared.

The figures were compiled in a study undertaken by economists at the Federal Reserve. According to the study, there were around 200,000 extra closures when the figures were compared against historical data. In a “normal” year around 8.5% of small businesses permanently close, totaling about 600,000. For 2020 this figure was closer to 800,000.

Of this total, about two-thirds of the affected businesses were individual companies, meaning 130,000 businesses closed altogether. Other closures that were recorded pertained to individual establishments of larger chains that had closed, whilst the business itself continued to trade.

The sector hit hardest was providers of personal services like hairdressers, barbers, and nail salons. These accounted for over 100,000 of the closures. One sector that was expected to be hit hardest was the hospitality and leisure industry. However, the picture here is mixed.

Whilst there were above-average closures of “dine-in” restaurants across the sector as a whole, this was offset slightly by increased spending on take-away food and outdoor leisure activities.

The good news is that these figures are far fewer than had been expected. An earlier study by The Hamilton Project had calculated that in the first three months of the pandemic over 400,000 small businesses had closed. A fact that the Federal Reserve analysts noted in their study, saying that –

“Actual exit is likely to have been lower than widespread expectations from early in the pandemic.”

Although the results are more promising than expected, it was also noted that many small businesses are only just surviving, and the weight of unpaid debts, back rent, and other accumulated expenses is likely to keep the closure level higher than average for at least the rest of the year.

Also, to be considered is the fact that the Federal Reserve study does not account for businesses with no employees. There are about 26 million of these businesses in the USA and no accurate figures have been published as to how many of these ceased trading.

The study does not detail why the closure level is lower than forecast. However, some economists have said that extensive government schemes aimed at alleviating the pressure on small firms helped. Schemes such as the Paycheck Protection Program, which provided $525 billion in forgivable loans to businesses, gave many smaller companies the leeway they needed to stay open.

Scott Stern, a management professor at MIT’s Sloan School of Management said –

“The PPP allowed small businesses to ride things out. Not only are things less bad than we thought, but they are less bad by an order of magnitude.”

Other factors that have helped ease the situation are local government and state schemes that totaled $14 billion in aid for small businesses. Many lenders and landlords have also allowed small businesses to defer rent and loan repayments.