Fed: Small Businesses Face Heightened Risk of Failure Due to Pandemic

The coronavirus pandemic poses “acute risks” to the survival of many of the nation’s small businesses, the Federal Reserve said today in its semiannual monetary policy report. The Fed warned that depending on the evolution of COVID-19 and the pace of recovery, “some small businesses and highly leveraged firms might have to shut down permanently or declare bankruptcy, which could have longer-lasting repercussions on productive capacity.”

Roughly half of small business entered the pandemic with cash reserves that could sustain their businesses for fewer than 15 days without revenue, the Fed said. Since the pandemic began, a majority of small firms have experienced revenue losses, roughly half do not expect to return to their normal level of operations within the next six months and many have seen deep employment declines. “Taken together, these data suggest a considerable risk of failure for a large number of small businesses,” the report noted. While about three-fourths of the nation’s small businesses have applied for funding through the Paycheck Protection Program, the Fed noted that “some industries may face an ongoing need after the program expires.”

The Fed noted that banks were well-capitalized heading into the pandemic and have thus far been able to meet the credit needs of their customers while simultaneously strengthening loan loss reserves. However, the report noted that certain vulnerabilities—“most notably those associated with liquidity and maturity transformation in the nonbank financial sector”—that have amplified some of the economic effects of COVID-19.