25% of Small Businesses Say They'll Shutter Without Government Aid

Many small businesses are on the brink of closing down permanently due to the impact of COVID-19. In fact, 25% won't survive without another round of aid.

It's no secret that the coronavirus pandemic has taken a devastating toll on small businesses. And new data from the Federal Reserve Banks reveals that many of those that are still operational are hanging on by a mere thread.

Small businesses need aid

In a survey of small businesses with 499 or fewer employees conducted six months into the pandemic, 88% said their revenue had yet to return to pre-coronavirus levels. That's not shocking given the way many businesses were forced to limit capacity and change the way they operate and the general economic and unemployment crisis that's forced many consumers to cut back on nonessential spending.

In fact, of the nearly 10,000 businesses that participated in the survey, 64% said they'd apply for another round of government aid if it were to become available. And of those companies, 39% said they'd be unlikely to survive without additional aid. All told, that's 25% of those small businesses that risk permanently closing their doors without additional relief.

More PPP funding is available

Since the Federal Reserve Banks conducted the survey, more aid has been made available to small businesses via the Paycheck Protection Program (PPP). In fact, companies that already received and exhausted an initial PPP loan can apply for a second draw now.

But eligibility requirements are stricter this time around, and some businesses may be left out in the cold. For one thing, second-draw PPP loans are only available to businesses with fewer than 300 employees, whereas the first round of loans was available to those with 500 or fewer people on staff. As such, some businesses won't qualify this time around despite needing that aid.

Furthermore, to get a second PPP loan, businesses must have experienced a revenue loss of at least 25% for one quarter of 2020. For many companies, that won't be a difficult thing to prove. But it does mean that businesses with significant losses not quite hitting 25% will be excluded from a follow-up PPP round. That could end up putting them at risk of closing.

Other borrowing options to consider

Businesses that don't qualify for a second PPP loan can seek to borrow elsewhere. The upside of PPP loans is that they're fully forgivable, provided at least 60% of their proceeds are used to cover payroll expenses. But many lenders are making affordable loans available to their business clients, so companies in need of aid should reach out to the banks they already have relationships with and see what options are on the table.

Community banks may also be a good resource for small businesses that don't qualify for a second-draw PPP loan. In fact, during the pandemic, 43% of small businesses turned to a small bank for access to credit, compared to 42% who sought to borrow from a large bank.

Will small businesses hang on?

At this stage of the game, there are hopeful signs that things may improve on the pandemic front this year. As a larger percentage of the public gets vaccinated, businesses may find that they're able to go back to operating at full capacity, and as jobs return and disposable income rises, consumers will be better positioned to support local establishments.

However, can struggling businesses hang on until that point is reached?

Affordable borrowing could be the ticket to surviving the next six to 12 months, so it's a good idea for businesses to look outside of the PPP if a second-draw loan isn't possible. Local establishments can also team up to support one another and develop bartering relationships that help preserve cash.