Why 200,000 additional small businesses closed in 2020.
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Many small businesses struggled to survive during the pandemic. Quite a few didn’t make it. According to information from the Federal Reserve, 200,000 small businesses closed in 2020 and about 130,000 of them were individual companies. Small businesses like restaurants, salons, retail stores and more were all forced to close their doors to the public in March 2020 to adhere to strict stay-at-home orders. Many thought these closures would be a few weeks, but it, unfortunately, turned into months for many businesses across the U.S. This was just the tip of the iceberg of many decisions that hurt small businesses during the pandemic.
Businesses forced to close
Stay-at-home orders were a tool used to prevent the spread of coronavirus, but many Americans were left wondering why big corporations like Walmart and Amazon could stay open while small businesses were ordered to remain close. These closures only helped these already huge businesses become even more profitable at the expense of small businesses, with Amazon’s profits increasing nearly 200% during the pandemic and Walmart’s increasing 45% in the first three quarters to $15.6 billion.
Aid was taken by large businesses
Shortly after stay-at-home orders were issued, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion economic stimulus bill, was passed providing relief to individuals and businesses impacted by the pandemic. The Paycheck Protection Program was the largest loan program with nearly $350 billion in funds available for small business owners to claim. The goal was to provide small businesses with less than 500 employees a forgivable loan to cover eight weeks of payroll. However, when the program launched, small businesses had a difficult time applying for the loan as many large businesses, who had well established relationships with lenders, were being favored over small businesses. In fact, a survey by the National Small Business Association in April 2020 found that 52% of small businesses that applied for PPP loans didn’t receive them.
As the year went on, more information was released highlighting the challenges small businesses faced when trying to secure a loan. According to information released by the Small Business Association in December 2020, more than half of the PPP funds went to 5% of the recipients, all of which were bigger businesses. When the second wave of funding became available at the beginning of the year, the requirements for a second PPP loan were changed to allow only businesses with less than 300 employees that could show a 25% or greater reduction in gross income to qualify. It set aside $15 billion for community financial institutions and business owners in low-income neighborhoods. Unfortunately, these changes came too late for the more than half of small businesses that couldn’t secure a loan nearly one year prior.
After more than a year of navigating the challenges thrown at them, small businesses are more fragile than ever and are still working to recover. The MetLife & U.S. Chamber of Commerce Small Business Index found that in Q1, 59% of small businesses predicted it will take six months to a year to get back to normal. While small businesses are working to recover, President Biden’s proposed tax policies loom as the next hurdle for owners to leap. We’ll discuss the impact of the capital gains tax proposals on small businesses in my next article.