By Paul Peterson, Managing Partner

The plight of America’s small businesses has been laid bare in 2020. Covid-19 has revealed how challenging business is for those that account for nearly half U.S.  jobs.  In our inaugural survey of Small Businesses, conducted in conjunction with Sapio Research, we took the temperature of hundreds of founders and financial executives to understand just how deeply Covid-19, and the responding Federal legislation, impacted their business.

We learned that few small businesses in the U.S. were unscathed. 81% loss revenue because of Covid-19,  30% on average. To make up for this loss, they’ve cut spending: 37% either furloughed or laid off staff. Sadly, 9% closed up shop for good and 5% plan to do so in the coming months. The road to recovery will likely take years and will have ripple effects that are both broadly economic and personal.  Many small businesses, especially the smallest of the small (25 or fewer employees), were left out of Federal aid and turned to other types of funding for continuity: they’ve tapped into personal savings and credit; took out business loans and even borrowed from their retirement accounts.

PPP Loans Missed the Mark

60% applied for a PPP loan and of the total respondents (whether they applied or did not apply, only 26% received a PPP loan including 41% of those in 100 – 499 employee sized companies and just 17% of under 25 employee companies.

The Federal Government could have done a much better job at communicating the rules to small businesses, which changed and relaxed over time. Some small businesses didn’t apply because they weren’t sure if they’d even be allowed to reopen or whether they could meet the Federal Government’s criteria. Others didn’t get funding because of capacity issues on the side of the lender. Some lenders were so overwhelmed they couldn’t even answer small business questions related to lending and the application, while others feel  that they’re not being compensated appropriately and that they spent more administering the loans than they made.

For the next round of PPP funding, it will be critical to not impose onerous restrictions that will limit the amount of businesses that can apply.

Tightened Credit Adds Stress

62% recently attempted to renew a line of credit of which half said they received a more strict application criteria and/or an increase in interest rates or fees (43%). Wiss has heard from small businesses that banks are denying them credit because they took out a PPP loan. In one anecdote, a bank told a client that, if they were so concerned about the future of their business that they applied for a PPP loan, how could they feel confident to lend to them further?

Businesses are now being considered a higher risk so their interest rates are going up and banks are taking a more conservative stance on lending.  Financing is harder to find and the government should be there to help but they aren’t.  A lot of the money didn’t get where it needed to go. Small businesses are having to look at ways to make money now to offset the money loss from PPP.  Small businesses are the majority of the economy, and employ nearly half of Americans. The fact that they are not participating or getting enough help is bad news for the economy.

Founders Risking their Financial Futures

21% of those we surveyed tapped into their personal savings; 8% borrowed from their retirement accounts; and 7% took out a personal loan.  This is startling for a number of reasons. First, tapping one’s retirement account is likely a measure of last resort for small business owners and demonstrates just how dire the situation is for many that they’d risk their own retirement for a business that could potentially fail. Americans already don’t have enough retirement savings and these business owners are borrowing from their future economic security.  This is also a costly financial decision. Not only were they selling assets at a low point in the market, but they are paying taxes on the withdrawal.

Advice to small businesses

Businesses that reduced headcount, cut costs, and implemented other strategic changes will want to evaluate their business model when reopening commences. A revised budget should be prepared, and this will help business owners assess their options moving forward. They should have an idea when they can bring back their employees, bring service offerings back online, and when additional investments in the business are warranted. Reach out to customers and vendors to assess any issues that may have cropped up over the last 2 months. And make sure you have some cash cushion or access to liquidity over the next few months. We are operating in a changed business landscape, and we should be cautious in how we deploy capital and resources moving forward.

Tapping one’s own savings and retirement should be a last resort for businesses. Before taking on these measures, owners and executives should take advantage of both state and federal relief measures followed by working with their bank and creditors for a cash loan or increased line of credit.