All-Member Community

Small Businesses Are Worse Off Than We Thought

By Kimberly Fantaci posted 04-20-2020 12:26 PM


If the COVID-19 crisis lasts four months, 65 percent of small retailers say there’s a good chance they’ll be forced to close permanently by the end of the year. Among restaurants and bars, 70 percent expect to go out of business if social-distancing orders last into July.

That’s according to a new survey (pdf) of nearly 6,000 small-business owners conducted by a team of researchers in partnership with Alignable, an online business networking platform with 4.5 million members. The survey results paint a bleak picture of America’s current small-business ecosystem, in which results find 43 percent of firms are temporarily closed and 40 percent of the workforce, on average, has been laid off or furloughed since late January.

Retail, entertainment, food services, hospitality, and personal services industries have been hit hardest as social distancing guidelines and stay-home orders restrict in-person operations, sinking demand to near zero. Professional services businesses have fared better, but they have not been spared—just 63 percent say they could weather a four-month public health lockdown.

The severity of the shock is also due in part to an overall lack of liquidity. On average, survey respondents with less than $10,000 in monthly bills had only enough cash on hand to cover one month of expenses.

“Firms today are very lean and cash-strapped,” says Christopher Stanton, the Marvin Bower Associate Professor at Harvard Business School. “They need to cut expenses to the bone to ride out this crisis.”

Stanton worked with HBS colleagues Michael Luca and Zoe Cullen; Harvard University economics professor Ed Glaeser; and Alex Bartik of the University of Illinois and Marianne Bertrand at the University of Chicago’s Booth School of Business, to craft the survey and analyze responses.


The survey captured a snapshot of the pandemic’s impact on small businesses, including business owners’ perceptions about their prospects for survival and how helpful government aid programs will be in keeping firms afloat.

The survey results highlight how critical the duration of the crisis will be in determining the fate of small businesses. Across all industries, 53 percent of respondents said they would be forced to close their doors by December if current restrictions last four months. If normal operations were to resume within one month, 72 percent reported a high likelihood of staying in business.

“Fifty percent of respondents believe that the crisis will last at least until the middle of June,” the researchers wrote in a working paper summarizing the survey findings, “suggesting that many businesses expect this to extend well beyond their current cash.”

Survey respondents indicated that demand shocks and employee health concerns have been more disruptive than the supply chain problems that are more damaging to large companies.

By providing a detailed look at the effects of the economic shutdown and the ways in which small businesses are adjusting both their behaviors and expectations as the situation unfolds, the researchers aim to help shape potential policy responses.

“Everything is rapidly evolving,” says Luca, the Lee J. Styslinger III Associate Professor at HBS, “and this survey helps to get some baseline understanding of what is happening in close to real-time.”

Those responses could come from government, larger businesses, or digital platforms, says Luca, whose past research has focused on platform design. For example, Luca and his colleagues reached out to online rating app Yelp several weeks ago to explore ways the company might help small businesses dealing with the crisis. Among other initiatives, he pointed to donations and gift card sales as potential stopgaps. “It’s something we thought might help at the margins with the immediate liquidity crisis,” he said.

As it turns out, Yelp had similar ideas and ended up making changes to the platform. The company has now made it easier for businesses to link to gift cards from other platforms, and is working through the details of a partnership with GoFundMe to help facilitate donations for businesses. Other platforms such as Uber are working on similar initiatives.

Distrust of government aid

The survey data also shed light on small business owners’ perceptions of the CARES Act. Through the Paycheck Protection Program, part of the federal government’s $2 trillion economic relief package, small businesses can apply for low-interest loans, all or most of which will be forgiven, based on amounts spent on wages, rent, and utilities.

Upon learning the details of the PPP loans, 85 percent of respondents reported optimism about their chances of surviving the crisis. However, only 70 percent of them expressed interest in pursuing such government subsidies. Cullen, an assistant professor at HBS who researches labor market inequality, was surprised that the interest number wasn’t higher “considering the offer on the table.”

“These are very generous terms,” she says. “It’s not free money necessarily, but it’s very close to that… The low rates of up-take, seen in that light, are really a call to action to figure out what it is that’s preventing some businesses from pursuing this federal help.”

A significant number of survey-takers said they would not apply for government loans because they anticipated problems with accessing the funds due to red tape and distrust in the government to forgive the loans.


These results show that more must be done to inform business owners about their options and remove barriers to accessing government funds, says Cullen. Those barriers could include “the extent to which lenders prioritize simplicity of the sign-up process, transparency of eligibility and repayment rules, and speed of accessing cash,” the researchers wrote.

To survey small businesses, the research team consulted HBS Senior Fellow Karen Mills, former head of the United States Small Business Administration. Mills, an investor in and advisor to Alignable, put the team in touch with the company’s CEO.

Alignable members received a link to the survey March 26. More than 5,800 responses from companies with fewer than 500 employees were collected within one week. Overall, the sample mirrors closely the 2017 Census of US Businesses in terms of firm size, industry, and geographic representation, with a few exceptions. The sample is skewed toward the retail industry and the coasts, Stanton says, overrepresenting California and the Mid-Atlantic states, where the pandemic has been most severe.

The research team is continuing to collect information about the status of the small-business ecosystem. They want to find practical ways to help, including by providing guidelines for navigating funding options and steering policymakers toward effective solutions as they consider additional stimulus, says Luca.

“As new policy questions come up and new questions about the evolving landscape come up,” he says, “we’re hoping to keep asking in rapid fire questions to small business owners to help guide the policy and managerial discussions.”

About the Author

Kristen Senz is a writer and social media editor for Harvard Business School Working Knowledge.